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Monday, August 27, 2012

Watch How Republican Convention Treats Fed Independence

A major stealth issue to watch for at the Republican Convention is how key Republicans talk about the Fed's independence. Ben Bernanke is relatively unpopular as chairman of the Federal Reserve. In 2001, 74% of Americans expressed confidence in former Chairman Alan Greenspan to do the right thing for the economy. In 2012, only 34% of Americans express the same level of confidence in Chairman Ben Bernanke while -- for the first time since Gallup began tracking in 2001 -- more Americans (46%) say they have only a little confidence or almost none in Bernanke. This lack of confidence in the chairman of the Federal Reserve reflects the increasing political risk facing the Fed's continued independence.

About half of Democrats express confidence in Bernanke while only about one-third of independents and Republicans do.

The financial crisis and the associated extraordinary actions of the Fed have greatly changed the public perception of the Fed. At the same time, Ron Paul -- a strong proponent of reining in the Fed --gained much added support for his long-held views during the Republican presidential nominating process.

Most importantly, the Fed faces some key choices at its Sept. 12-13 meeting that could influence the economy, the election, and the future independence of the Fed. Given the FOMC (Federal Open Market Committee) minutes of their most recent meeting, released last week, it seems the financial markets expect the Fed to flood the economy with more money when it meets -- that is to implement so-called quantitative easing (QE3).

Whether more money is necessary or helpful to the U.S. economy right now is debatable. Money flow doesn't seem to be the problem holding back job creation. However, more money would continue to support commodity prices and the stock market -- both of which impact economic confidence. At the same time, the higher food and gas prices often associated with more money in the economy could worsen the current economic slowdown.

Politically, the situation is very difficult. If the Fed goes ahead with QE3, Republicans might see it as not only unnecessary, but a sign that the Fed continues on a reckless monetary path. If the Fed doesn't implement QE3, the markets expectations will not be met and the markets could drop significantly. In turn, economic confidence -- particularly of upper-income Americans -- could also worsen, hurting the economy, and leaving Democrats to see the Fed as potentially sabotaging the presidential elections with a September surprise.

Given the composition of the FOMC, my guess is that the Fed will announce at its September meeting that it plans to implement QE3 based on FOMC member perceptions that high unemployment and the weak global economy justifies such an extraordinary effort. In this context, it is worth watching how the Republicans talk about the Fed and its current policy decisions during their convention. How the Fed acts between now and the election -- and how it justifies any action it does or does not take -- could have more impact on its future independence than on the near term future of the U.S. economy.

Wednesday, August 22, 2012

Retired Americans Must Reinvent Themselves to Get a Job

While everyone knows jobs are hard to get, Americans who want to work during retirement sometimes seem forgotten. This is important not only because many baby boomers need to continue working in retirement if they want to retire comfortably, but also because the longer they delay taking Social Security benefits or defer using Medicare, the less costly those programs will be to the federal government.

A new Wells Fargo/Gallup Investor and Retirement Optimism Index poll sought to gain some insight into this issue. Among the key findings is that investors, retired or not, feel jobs are not only hard to get for retirees, but also harder for retirees to get than for other Americans.

Only 8% of investors rate jobs as easily available for retired Americans, while another 40% rate them somewhat available.

Nearly two in three investors (63%) say job availability is "getting worse" for retirees.

About half of investors say the job situation facing retirees is worse than that facing other Americans.

Given this investor perception of the job situation facing retirees, it may be surprising that when planning for retirement, 74% of investors think Americans should count on working part time as a major source (14%) or a minor source (60%) of retirement income.

On the other hand, it is not surprising that eight in 10 investors believe retired Americans need to reinvent themselves to get a job. The idea is that retirees must think about the job they can do now, given their age and circumstances, as opposed to what they were able to do before they retired. Of course, this is a long way from the old idea that retirement was a time to sit on the beach and play golf, as well as from the newer mindset that retirement is a time when you can do what you want to do, instead of what you have to do to get by. Maybe, we'll soon have to undertake another look at what retirement means going forward.

Reinvented or not, the magnitude of the job challenge for retired Americans is enormous. Right now, only 10% of retirees say they are working part time to maintain a comfortable living in retirement. In contrast, 58% of nonretirees say they plan to work part time as a way to maintain a comfortable living in retirement. 

Friday, August 17, 2012

August Unemployment Not Looking Good

New Gallup unemployment data suggest an increase in the government's seasonally adjusted unemployment rate for August when it is reported on Friday, Sept. 7. During recent months, Gallup's measurements have been more optimistic than those of the BLS. Barring a sharp reversal in this relationship, the government's unadjusted unemployment rate might be expected to stay the same or increase in August.

Gallup's Daily tracking of the unemployment situation is based on interviews with more than 30,000 adults over the 30 days ending Aug. 15, and shows essentially no change in the unadjusted unemployment rate at 8.3% compared to 8.2% in July. In turn, this suggests that the government's unadjusted unemployment rate could increase to 8.7% in July from 8.6% in June. The government's measurement of the unadjusted unemployment rate has been known to differ with Gallup's findings, but a drop of 0.3% in July is necessary to bring the government's unadjusted rate down to Gallup levels.

More interestingly, there were no BLS seasonal adjustments in August 2011. If this remains the same in 2012, the Gallup seasonally adjusted unemployment rate for August would be 8.3% while that of the BLS would be 8.7%, assuming a similar increase to that shown in the Gallup data. Further, Gallup's data show the labor force participation rate to be increasing in August. In turn, that could have an additional negative impact on the unemployment rate for August if the government's data show a similar pattern.

Trying to guess the U.S. unemployment rate has been a thankless task in 2012, even using Gallup's 30,000 interviews as a basis for estimation -- even worse than trying to guess the results of the government's establishment survey. However, like ADP's (Automatic Data Processing) estimates of the establishment survey results, Gallup's numbers have been close to the household survey results much of the time.

Regardless, barring heroic adjustments or a sharp change in direction, Gallup data suggest the seasonally adjusted U.S. unemployment rate for August will increase -- possibly substantially -- when announced in early September.    

Tuesday, August 14, 2012

Ryan Addition, Fiscal Cliff Could Halt Economy

The addition of Paul Ryan to the Romney presidential ticket is going to greatly increase the political focus on Medicare, Social Security, the federal budget deficit, and the fiscal cliff. In turn, just the intensity of these important national debates could have the unintended consequence of bringing today's slowing economy to a halt in the months ahead.

For example, 71% of U.S. investors think concerns about the fiscal cliff will force consumers and businesses to pull back on spending and investing -- slowing the economy in the second half of 2012 according to the July Wells Fargo/Gallup Investment and Retirement Optimism Index poll.

Fifty-four percent of U.S. investors say they are paying "a great deal" or "quite a lot" of attention to the fiscal cliff -- defined as "the automatic elimination of the Bush and other tax cuts and the automatic decrease in spending at the end of this year." Further, 61% think that if Congress doesn't act to deal with the fiscal cliff, the economy will go into recession next year.

Similarly, 58% of investors say they are extremely or very worried about the impact of potential changes in Medicare on older Americans, while 56% say the same about potential changes in Social Security. 

If investors are right, the existence of the fiscal cliff is already slowing the U.S. economy. No matter the merits, a major political battle over the fiscal cliff, entitlements, and the federal budget deficit is likely to only increase today's very high level of economic uncertainty, and thus bring the already-slow U.S. economy to a halt.

Survey results are based on telephone interviews with investors having $10,000 or more of investable assets conducted June 30 through July 11, 2012.

Thursday, August 9, 2012

Small Business Net Job Creation Helps Explain Job Growth

In July, 14% of U.S. small business owners say they increased jobs at their companies over the past 12 months and 21% say they decreased them according to the Wells Fargo-Gallup Small Business Index. This -7 percentage point difference is about the same as the -9 of the prior three quarterly measurements, but slightly better than the -11 of July 2011. This lack of improvement in small business self-reported hiring helps explain why too few new jobs are being created to significantly lower the U.S. unemployment rate.

In normal years, there is a positive difference in hiring as small businesses hire more new employees than they let go -- and in very good years this difference reaches the double-digits. This has not been the case since the recession and financial crisis 2008-2009. There was considerable improvement in the small business jobs situation after small business net new hiring -- over the 12 months covering 2009 -- hit its low in January 2010, but less improvement in net new hiring since January 2011.

In July, small business owners' expectations for hiring over the next 12 months were at a positive difference of +10. This is the same as in April, down from the +14 of January, but better than the +4 of July 2011. This lack of improvement in small business owners' self-reported hiring expectations suggests a lack of job growth sufficient enough to lower the unemployment rate is likely to continue during the second half of 2012.

Traditionally, small business owners -- as entrepreneurs -- are optimistic that their company will hire more people in the future than in the past. As a result, more owners routinely expect to increase their hiring than decrease it over the next 12 months. Over time, the pattern to such hiring expectations has been similar to the results of the past 12 months -- if at consistently more positive differences.

The lack of improvement in small business owners' net new hiring is consistent with Gallup's monitoring of the U.S. unemployment rate. It also implies a continuation of the modest economic and job growth of recent months.  

Friday, August 3, 2012

BLS and Gallup Data Show Jobs Situation Getting Worse

Despite the unexpectedly large increase of 163,000 jobs in July according to the establishment survey, Gallup and BLS household survey data show that the U.S. unemployment situation continues to deteriorate. In this regard, it seems like Gallup's finding of an increasing unadjusted unemployment rate and a shrinking workforce have a lot of face-validity given the slowing U.S. economy.

On an unadjusted basis, the BLS reports the number of employed Americans decreased by 76,000, while the unemployed increased by 216,000.

As a result, the government's unadjusted unemployment rate increased to 8.6% in July from 8.4% in June -- the same size increase shown in Gallup's July unemployment results.

After the government applied its seasonal adjustments, the decrease in the number of employed Americans is 195,000, while the increase in the unemployed is 45,000. As a result, the BLS reported an increase in the seasonally adjusted unemployment rate to 8.3%. It is noteworthy that the government's seasonal adjustments seem to add to, rather than diminish, confusion regarding the jobs picture.

At the same time, the BLS reported no change in the unadjusted participation rate at 64.3% and a drop in the seasonally adjusted participation rate to 63.7% in July from 63.8% in June. Gallup's survey finding is that the workforce declined much more sharply on an unadjusted basis, and therefore also on an adjusted basis. Regardless of whether this difference in participation rates between Gallup and the BLS is a lagged effect associated with survey differences, any decline in the participation rate adds further support to the idea that the U.S. jobs situation is getting worse, not better.

Thursday, August 2, 2012

The Incredible Shrinking U.S. Workforce

Gallup Daily tracking, based on a random sample of more than 29,000 U.S. households, shows a potential dramatic drop in the government's seasonally adjusted workforce participation rate to 63.1% in July down from 63.8% in June. That is, the BLS may report the number of Americans working or wanting to work to be at its lowest level since April 1978. This would be extremely bad news for the U.S. economic outlook in the sense that current economic optimism is so low that millions of Americans are giving up on finding a job. It could also translate into a sharp drop in the U.S. unemployment rate for July to be announced by the government on Friday.

Although Gallup's data suggest an uptick in the unadjusted unemployment rate in July, the consensus forecast is that the unemployment rate will remain unchanged at 8.2% in July. Wednesday's ADP report provided some support for the consensus by reporting a surprisingly strong increase of 163,000 jobs in July. Further, the lack of action by the Federal Open Market Committee following its two-day meeting that ended Wednesday might also be interpreted as a sign the Fed is not too concerned about the unemployment rate increasing later this week.

Regardless, if the government's monitoring of the workforce participation rate tracks with Gallup's results, it seems more likely the BLS will report a decline than an increase in the U.S. unemployment rate on Friday. In turn, this will be another sign of how misleading the current way of measuring the U.S. unemployment rate can be.

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