In the release of the FOMC minutes from the July meeting the members were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to “taper” the current rounds of bond buying this year if the economy strengthens. However, the real measure of an improving economy is really not the yardstick of GDP, which is currently limping along at a 1.4% annualized growth rate currently, but rather employment.
The Federal Reserve’s target for their accommodation program has been a fall in the Bureau of Labor Statistics official unemployment rate to 6.5% from the current level of 7.4%. However, while the unemployment rate has fallen in recent months, it has come at the expense of full-time employment and large number of individuals simply dropping from the employment count into the abyss known as “Not In Labor Force.”
As I stated in “Why The Unemployment Rate Is Irrelevant”:
“From the lows of the recession there have been roughly 5.52 million jobs created. However, there are only 270,000 more jobs today than there were in January of 2009. However, during that same time frame 9.52 million individuals have simply fallen out of the labor force. The argument has generally been that these individuals have slipped off into retirement. If these was truly the case we wouldn’t be near record levels of food stamp participation.
The importance of these two specific points is that while the Federal Reserve has a target of 6.5% unemployment that target could be achieved, not by increases in actual employment, but through further deterioration of the labor force and increases in population. While the Fed could certainly claim victory in achieving their ‘full employment’ target; the economic war will be have been soundly lost.”
The reason I bring this up is that the most recent release of the weekly Gallup Employment Survey has shown a sharp spike percentage of individuals unemployed. The chart below shows the weekly Gallup survey versus the monthly BLS unemployment rate. As you can see the trends of unemployment trend in the same direction but the since Gallup is a weekly survey it is more volatile. However, what is important to note is that the weekly Gallup survey tends to lead movements of the monthly BLS report.
As of the latest reported week the Gallup Survey of unemployment has surged from its April lows of 7.3% unemployment to 8.9%. This certainly doesn’t bode well for continued increases in the upcoming BLS employment reports.
More importantly, as I have discussed in the past, the real employment story is in the payroll to population data. Employment growth has remained well below working age population growth in recent years which is why the employment-to-population ratio has remain mired at the lowest level in the early 80’s. The chart below is Gallup’s “% Payroll To Population” data which confirms that payroll’s are declining.
This surge in unemployment, and drop in payrolls, is partially explained by companies which have recently announced they are cutting full-time employment and reducing staff to absorb the higher costs of the impending Affordable Care Act (ACA). However, it is also that economic growth remains weak. The continued weakness in corporate earnings reports suggest that demand is waning while input costs are rising putting businesses on the defensive.
This was confirmed by Bill Dunkleberg in the lastest NFIB Small Business Survey when he stated:
“Gross Domestic Product (GDP) revisions confirmed what the NFIB survey has been reporting – we are not producing much additional output and not employing many new workers…Only 160,000 new jobs (July) would be insufficient to lower the unemployment rate to 7.4 percent were it not for more people disappearing from the labor force…Broader measures of unemployment reveal a weak labor market.
The amazing stock market continues to surge ahead, even as prospects for earnings growth fade. On Main Street, there is no evidence of profit growth. The economy remains bifurcated, exports turned in a good performance, mostly activity for the large manufacturers, energy companies and agribusiness. Sales for small businesses, especially at service firms, continue to languish.
Unfortunately, nothing is being done to allay the most pressing concerns identified by job creators—dealing with rising health insurance costs, regulations, tax complexity, energy costs and general economic uncertainty. The President wants a deal on ‘corporate taxes’, but most small businesses are not incorporated. Energy policy is more confused than ever and the volume of new regulations is mounting. Should I even mention the mounting problems with Obamacare? We are in the ‘tankeroo,’ not sinking, but trying to stay afloat.”
The problem for the Federal Reserve is that with economic growth remaining very weak; a reduction in the “accommodation” to the financial markets is the same as “tightening.” This tightening effect is being compounded by the sharp rise in interest rates which slows economic growth where it counts the most – on “Main Street.” If Gallup’s data continues to lead the BLS report, as it has done in the past, this could lead to real concerns for the Federal Reserve in the months ahead as the unemployment rate rises, economic growth weakens and the market corrects. With the Fed Funds rate already at zero, and Bernanke’s “QE program” running full speed – the question will become what, if anything, can the Fed do to keep the economy afloat then?
Courtesy: Lance Roberts
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