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Monday, July 30, 2012

U.S. Economic Expectations Imply 100 Days at Stall Speed

This week, both the Fed and the European Central Bank meet and seem likely to adopt additional "creative" ways to stimulate the global economy in an effort to avoid a EU financial crisis and a potential global recession. While monetary authorities have proven they can stimulate global equity markets, it is not clear that they can do the same for the global economy. This is particularly the case in the U.S. as the impact of the presidential elections on the real economy seems similar to the fallout of last year's federal debt ceiling controversy.

In this regard, if you are experiencing feelings of economic déjà vu right now, you are not alone. The percentage of Americans saying they expect economic conditions to get worse has increased throughout July, going from 55% over the three days ending July 5 to 63% over the three days ending July 29 -- a sharp deterioration over less than one month.


A year ago, economic expectations showed a similar deterioration during July -- though more Americans at that time said the economy was getting worse.


The sharp drop in economic expectations in 2011 was largely attributable to the political confrontation over the federal debt ceiling, which ended last August. In 2012, it seems likely the fiscal cliff -- and its many related issues -- is creating a similar economic stall. Consumers and businesses are pulling back on their expectations and spending plans in light of major public policy uncertainties over the next 100 days as the election campaign unfolds and the economic fallout is assessed.

Last year's stall illustrated how political confrontation can bring the real-world economy close to recession. This year's worsening in economic expectations may show how presidential elections can do even more harm to the real economy -- particularly if the jobs situation does not show signs of significant improvement when the government's unemployment numbers are released on Friday.

Wednesday, July 25, 2012

U.S. Workforce Likely to Shrink in July

Gallup Daily tracking suggests a sharp drop in the so-called participation rate -- those employed plus those unemployed and looking for work as a percentage of the population -- for July to 67.7% from 68.2% in June. In turn, this drop in the participation rate implies that the U.S. unemployment rate for July, to be announced by the government on Aug. 3, could show an unexpectedly sharp decline.



When Americans become discouraged and stop looking for work, they drop out of the workforce. This tends to reduce the unemployment rate, as the proportion of those unemployed and looking for work drops more sharply than the overall workforce. In the extreme, the way the U.S. unemployment rate is calculated, if everyone unemployed right now decided to stop looking for work, it would translate into a 0% unemployment rate.

Further, when the BLS seasonally adjusted the July participation rate last year, the government reduced the rate by 0.6 percentage points. Presumably this was done to adjust for an expected seasonal surge in the participation rate. If we adjust the government's June 2012 unadjusted participation rate of 64.3% by the 0.5-point decline in Gallup's data plus the 0.6-point seasonal adjustment, we would get a new government seasonally adjusted participation rate of 63.2% for July. This would be a new low in the government's seasonally adjusted participation rate since the recession and financial crisis of 2008-2009.



A sharp decline in the U.S. workforce in July may make sense, given the pessimism generated by the slow job growth of the past several months -- it is easier to stop looking for a job when the public's impression is that jobs are largely unavailable. In addition, the reduction in the availability of unemployment insurance may make some Americans who are no longer eligible for benefits -- and discouraged about looking for a job -- decide to stop looking and thereby leave the workforce.

Regardless of the reasons, a sharp decline in the U.S. workforce could create a surprising drop in the U.S. unemployment rate for July. While such a decline would be good news if it were related to new job growth, if it is largely the result of many more Americans getting discouraged and dropping out of the workforce, that will not be the case.

Tuesday, July 10, 2012

Upper-Income Economic Confidence Drop May Match Last Year's

The percentage of upper-income Americans (those having annual incomes of $90,000 or more) saying the U.S. economy is "getting worse" increased to 55% in June -- approaching the 59% of one year ago. At the same time, 41% say the economy is "getting better" -- also close to the 37% of June 2011. This deterioration in upper-income confidence about the future of the U.S. economy appears to be another sign that this year's economy may be following a pattern similar to last year.


Upper-income Americans were even more optimistic in early 2012 than in early 2011. From February to May, the percentage of upper-income Americans saying the economy is "getting better" essentially matched the percentage saying it is "getting worse." However, by June the spread between these measures had increased to 14 percentage points.

In June 2012, the percentage of lower- and middle-income Americans (making less than $90,000 a year) saying the economy is "getting worse" is at 56% and the 39% saying it is "getting better" essentially matched the ratings provided by upper-income consumers. Lower- and middle-income Americans are generally less optimistic than upper-income Americans and that was the case for most of the past 18 months. The exception took place during August through October 2011 when the federal budget ceiling confrontation brought concerns about the economy "getting worse" back up to the 75% to 80% recession range.   


Upper-income Americans' confidence is important, because these are the consumers who have the disposable income available to spend. When these consumers pull back, the economy tends to slow.

The danger now appears to be that upper-income consumers and the U.S. economy will repeat the swoon of one year ago. Last year, the economy slowed and approached recession as Washington was unable to get its act together concerning the federal budget ceiling. This year, the inability of Europe to deal with its financial issues and the slowdown in China are creating major concerns about a global recession. Add in the U.S. presidential election, the intensifying political battles over the Bush-era tax cuts, and the so-called fiscal cliff, and the U.S. economy could easily repeat last year's economic stall -- but this time it could last until November.  

Friday, July 6, 2012

Unadjusted BLS Jobs Numbers Are Even Worse

While Wall Street and the Obama administration were greatly disappointed in the 80,000 new jobs added in June and the seasonally adjusted unemployment rate remaining at 8.2%, the unadjusted BLS results show an even bleaker employment picture.

According to the BLS Household Survey, on an unadjusted basis, the number of unemployed Americans increased by 913,000 in June. At the same time, the number of employed Americans increased 475,000 as the total workforce increased by 1.4 million. As a result, the unadjusted unemployment rate increased to 8.4% in June from 7.9% in May and the participation rate increased to 64.3% from 63.8%. In sharp contrast, the government's seasonal adjustments produced an unemployment rate of 8.2% in June -- unchanged from May -- and also left the participation rate unchanged at 63.8%.



In sum, the BLS unadjusted results show a much more serious and worsening jobs situation than implied by the seasonally adjusted data. In turn, the government's unadjusted unemployment data increases the odds that the Fed will try to flood the financial system with even more liquidity -- so-called quantitative easing (QE3) -- and something that should be a positive for Wall Street. The unadjusted results also suggest the U.S. economy is slowing further -- from its anemic first quarter growth rate of 1.9% -- erasing any lingering doubts that jobs and the economy will be the central issue in this year's presidential election.

Although Gallup's unadjusted unemployment rate tends to trend with that provided by the BLS, upon occasion, the two have diverged at various points in the past year. Gallup's unadjusted rate for June is 8.0% -- unchanged from May -- and much better than the government's 8.4%. Regardless, given the other signs of economic weakness, neither Gallup's nor the government's unemployment numbers provide much reason for economic optimism.

Monday, July 2, 2012

Unemployment Rate Likely to Fall in June

Despite what appears to be a slow and weakening U.S. economy, Gallup's unadjusted unemployment rate for the 30 days ending June 30 is 8.0% -- the same as in May -- and Gallup's seasonally adjusted unemployment rate for June is 7.8%, based on year-ago BLS seasonal adjustments. If the government's unemployment rate declines -- let alone falls below 8.0% -- on Friday, it is likely to be touted as a sign the U.S. economy is getting stronger, not weaker.

However, the reality is that such a decline in the government's unemployment rate more likely reflects the government's seasonal adjustments, changes in unemployment benefits, and a potentially shrinking U.S. workforce than anything going on in the real economy. While Friday's release of the government's unemployment rate remains potent politically, it is becoming more meaningless economically by the month.

Prior to the 8:30 a.m. ET release of the government's May unemployment rate on June 1, CNBC asked a panel of economists and market watchers to give their projections for the unemployment rate. Economists Mark Zandi of Moody's Analytics and Diane Swonk of Mesirow Financial both predicted a decline in the unemployment rate -- not based on economic improvement, but based on state reductions in their payment of long-term unemployment benefits. The idea was that as the number of weeks of eligibility for benefits is reduced, many of the long-term unemployed losing eligibility would decide to stop looking for work and drop out of the workforce. In turn, the resulting decline in the participation rate would lead to a declining unemployment rate -- one Zandi suggested would be much lower than 8% by election day.

Obviously, Zandi and Swonk were wrong about May's unemployment rate, but their mistake may be one of timing, not direction, as we look toward the June results. As it turns out, the government seasonally adjusts the participation rate -- the percentage of Americans working or looking for work -- similarly to the way it adjusts the unemployment rate. As a result, while the unadjusted participation rate increased 0.4 percentage points from April to May 2012, the seasonally adjusted participation rate increased 0.2 points during the same period -- leaving both the adjusted and unadjusted rates at 63.8%. The BLS seasonal adjustment to the unadjusted participation rate was -0.4 points in June 2011. Because Gallup's unadjusted participation rate showed a 0.1-point increase last month, using the BLS participation rate adjustment of a year ago could produce a substantial seasonally adjusted decline in the workforce in June -- reinforcing the projected decline in last month's unemployment rate.


Fed Chairman Ben Bernanke in his June 7 testimony before the Joint Economic Committee noted that "economic growth has continued at a moderate rate so far this year" and he went on to say "economic growth appears poised to continue at a moderate pace over coming quarters." Significant declines in the U.S. unemployment rate seem inconsistent with the moderate economic growth of the recent past and continued moderate growth during the remainder of 2012.

In sum, the government's seasonally adjusted unemployment rate may be a better measure of recent changes in unemployment benefit policies than of U.S. economic performance. More importantly, the complexity of the government's adjustments to the unemployment rate is reducing its face validity on a monthly basis.

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