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A Weak Economy?
Posted by: Jon Henke on Tuesday, February 07, 2006

Following on the same theme I touched upon in my TCSDaily article last month, I see Barry Ritholtz is pushing a if you dig into the numbers far enough, the economy is weaker than you think! message. Specifically, I'll address this...
A closer look at how various economic components are calculated reveals that the CPI dramtically understates inflation, or that job creation this cycle is so very poor, or why the Unemployment rate is misleading.
First, while Ritholtz may be right about CPI missing some elements like housing (of course, if we count that, we'd also need to inflate the denominator by counting rising home equity as increased wealth), research by the Boskin Commission indicates that CPI overstates inflation, and—while the BLS has instituted some corrections—that research has generally held up very well among economists. In any event, CPI is widely recognized as a poor substitute for an actual guage of inflation, so let's leave it alone for a moment.

Second, job creation in this cycle is less than in previous cycles, but there are a multitude of explanations for this. Inter alia, the increase in the undifferentiated labor supply, the massive increase in productivity and the fact that when you fall a shorter distance, you're bound to get a smaller bounce-back. If the unemployment rate had risen to 7-8%, we'd need a stronger recovery to get back to full employment.

Finally, though, there is Ritholtz' notion that "the Unemployment rate is misleading", because — as he says in the post and article to which he links — using "the fullest measure of unemployed persons", one finds that, in January 2005, the Unemployment Rate was "10.2%" — 10.2%! That's certainly steeper than the current 4.7% about which we all read!

Settle down, Beavis. There's more to it than that. Let's examine what Ritholtz didn't tell us:
  • First, he neglected to mention that his number was not seasonally adjusted. The Seasonally Adjusted number for Jan'05 was 9.3%.

  • Second, he neglects to compare that 10.2% with other periods. If things are bad now because of a seasonally unadjusted U-6 rate of 10.2%, does that mean that things were also bad in January of 1997, when that same unadjusted U-6 was 10.4%?


In fact, here's a 12 year stretch of seasonally adjusted data for the widest possible measurement of unemployment...

Show/Hide

Even the widest possible BLS measure of unemployment shows us operating at about the same place as we were in late 97-early 98. That, if I recall correctly, was not what one might call a bad period. In any event, today's U-6 rate is 8.4% — a historically good rate.

There are a lot of undercurrents in the US economy — notably, the housing market and energy prices, each of which could easily destabilize consumer confidence and radically reduce consumer demand — but the items Ritholtz mentions as evidence of a weak economy are not quite as robust as he suggests. In fact, I think they are decent evidence for a fairly strong economy.
 
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Previous Comments to this Post 

Comments
Yeah, well, it’s kinda hard to blame Bush for a GOOD economy, eh?
 
Written By: Bithead
URL: http://bitheads.blogspot.com
I think it is true (i.e. not liberal spin) that people feel the economy is weaker than it really is. Regardless of if the CPI is right or wrong, it is an aggregate measurement. We know that energy, health care and real estate (think renters, not home owners) are going up. When computing GDP, a dollar spent at Wal Mart is the same as a dollar spent at the gas station, a dollar spent on prescription drugs the same as a dollar spent at Best Buy. But it does not feel that way to the people spending the money. As the price of necessities go up, we spend more on them and less at Wal Mart and Best Buy, then it feels like we are doing worse even if the the GDP is the same. And since the domestic content of energy (all energy, not just oil), health care and real estate is much higher than the domestic content of goods at Wal Mart and Best Buy, the GDP will actually do better if we shift money from consumer goods to these necessities. But the average person is going to feel like their situation is getting worse since they have less money for the fun stuff.
 
Written By: Lighthouse
URL: http://
the GDP will actually do better if we shift money from consumer goods to these necessities. But the average person is going to feel like their situation is getting worse since they have less money for the fun stuff.
I wrote that "the housing market and energy prices, each of which could easily destabilize consumer confidence and radically reduce consumer demand", and it’s very true, I believe, that a deflation of the housing market or a sustained spike in energy prices could reduce aggregate demand. But if you look at the inflation data, you’ll see that spikes in energy prices don’t necessarily get passed on to other goods. (if they can’t pass it on, it’s not really inflation)

Anyway, the danger posed by energy and the housing market are just ever-present components of macro-economics. Bull-markets can always end. That’s not a sign of weakness in the market so much as a reflection of the fact that good times aren’t inevitable and eternal.
 
Written By: Jon Henke
URL: http://www.QandO.net
But if you look at the inflation data, you’ll see that spikes in energy prices don’t necessarily get passed on to other goods. (if they can’t pass it on, it’s not really inflation)
I agree but lets not kid ourselves, inflation is coming. And it will be deliberate, structural. Inflation is how nations in debt get out of debt, they inflate themselves out. I don’t know when it will start, not till we are forced to inflate, which is probably not till China stops sucking up our dollars. In the long run, I don’t even think it will be a bad thing. Inflation will mean our kids can afford to pay off our debt. Getting to the long term, now that could be interesting.
 
Written By: Lighthouse
URL: http://
I agree but lets not kid ourselves, inflation is coming. And it will be deliberate, structural. Inflation is how nations in debt get out of debt, they inflate themselves out.

Yes of course I remember the giant currency Inflation of 1989, that erased the deficit in the 1990’s.
...lets not kid ourselves, inflation is coming.
Sure just like death and taxes or more in this vein, Global Warming. "It’s not here today, but it’ll be here SOMEDAY and then there will be weeping and wailing and gnashing of teeth."

A lot of impressions aobut the economy are just that impressions.... the 1980’s were a "Boom time" but the Press reported it in terms of Japanese threats and THE DEFICIT! Funny a Republican was in charge a lot of them, THEN Bill C. becomes President and it’s "Let the Good TImes ROll!" And that feeds people’s impressions, given the same set of circumstances of 1996 ECONOMY IS GREAT and say 2006, "Economic FEARS" or "This is good news, BUT..." people will see the 2006 era as weaker, though objectively they are the same.
 
Written By: Joe
URL: http://
the 1980’s were a "Boom time" but the Press reported it in terms of Japanese threats and THE DEFICIT! Funny a Republican was in charge a lot of them, THEN Bill C. becomes President and it’s "Let the Good TImes ROll!"
Right, that early 90’s recession was just a big liberal bias MSM spin. It was great times all through that, we were just too mesmerized by the lies on network TV news to notice that we had it so good!

Joe, it is not always about politics. In fact, I think it is never about politics. Politics is froth, trivial, like sports, enjoyable but recreation. Just like you would not base your investments on who wins the Super Bowl, don’t base your investments on who is in the White House. The differences between the left and the right in the US, at least in regards to politicians who will get elected, is too small to make any real difference. That is not true in other places but it is true here.

There is a reality out there. The issue for me and my portfolio is separating the noise from the signal. And it is mostly noise these days especially on the web. Endless volumes of partisan noise as if all reality can be boiled down to left versus right talking points. That is why I like this web site, it usually has a higher signal to noise ratio than most

In theory we can we avoid inflation by increasing savings and reducing consumption. Maybe we will do it but I will bet you a bridge to nowhere that it wont happen that way. Stephen Roach says it much better than I can.
 
Written By: Lighthouse
URL: http://
Lighthouse the Recession of the early 1990’s was one of the MILDEST on record, not the worst economy in 50 years! The Economist made one good point about it, the Recession 1979-82 affected Rustbelt cities and low-to-moderate income WORKING families, the sort that Dan Rather et. al. could "Sympathize" with.

The recession 1990 until 1991 affected EAST Coast Middle/Upper Management types, i.e., Dan Rather’s neighbors. Then it became AWFUL, after all one KNEW Biff and Buffy, whereas Bob and Roberta lived in Akron and hadn’t attended the same university as you.

Economics is about politics, government policy affects the economy and politcs IS government politics. My other point is that politcs affects REPORTAGE about the economy.
 
Written By: Joe
URL: http://
Right, that early 90’s recession was just a big liberal bias MSM spin. It was great times all through that, we were just too mesmerized by the lies on network TV news to notice that we had it so good!
Lighthouse, the recession of 1990-91 was pretty tame by historical standards, but you wouldn’t have known that from the press.

During the 1992 campaign, Clinton and Gore kept calling it "the worst economy since the Great Depression" (or in the last 50 years, depending on which night you listened). Clinton and Gore were never challenged on their statements by anyone in the popular press. But the fact was that the recession had ended in March, 1991, and by the time of the 1992 election, we’d seen 6 straight quarters of positive GDP growth.

I won’t call it liberal spin, but don’t even try to say that the healthy economy during Bush 41’s last 18 months in office wasn’t underreported.
 
Written By: Steverino
URL: http://steverino.journalspace.com

You neglect to mention the reason why I say low unemployment rate is misleading: NILFs and the Labor Participation Rate

Indeed, you can see anything employment related I’ve written by clicking here.

Oh, and the Boskin deflator is of little value to anyone running money. It understates inflation, lags behind other indicators, and generally is of little investing value.

While academics and policy wonks may get excited about it, I do not know any fund managers who take it any more seriously than the Conference Board’s utterly useless LEIs.
 
Written By: Barry Ritholtz
URL: http://bigpicture.typepad.com/
I think its interesting to note that the reason the labor participation rate declined is due primarily to those age 16 - 24 going back to school. I wouldn’t categorize that as a bad thing. You can read more about it here:

http://www.bls.gov/opub/ils/pdf/opbils51.pdf

 
Written By: Tom
URL: http://
Um, no.

16-24 accounts for a little more than half;
Little more than half is still more than half, which would mean the same as "mostly" or "primarily" (primarily meaning the biggest cause).
Any time a large swath of the population suddenly decides NOT TO WORK makes me wonder what the hell is going on . . .
Let’s see...because those people decided their time is better spent doing something besides working? Or because those people have enough income through other household members or investments that they don’t need to work?

Gosh, someone might feel that having one parent home with their children at all times is better than having a shiny new SUV...how selfish of them!! They should know that society expects them to be out at some job, working away and being productive.

Get a grip, Barry. There is absolutely nothing wrong with people voluntarily leaving the workforce.

 
Written By: Steverino
URL: http://steverino.journalspace.com/
You neglect to mention the reason why I say low unemployment rate is misleading: NILFs and the Labor Participation Rate
The assumption, I suppose, is that the labor participation rate should have kept rising? Why? What is the optimal labor participation rate? For decades now, the participation rate has increased as women increasingly entered the workforce and the improving economy enticed more people into the workforce. We’re now at about the same level we saw in the early 90s. It may just be that that’s the equilibrium rate. It certainly can’t keep rising forever.

At any rate, in the item to which you linked with the words "the Unemployment rate is misleading", you cited the U-6 measurement, which dealt with marginally attached workers.
Oh, and the Boskin deflator is of little value to anyone running money. It understates inflation, lags behind other indicators, and generally is of little investing value.
The BLS certainly seemed to take the Boskin Commissions criticisms seriously, and they’ve generally held up fairly well. CPI is a useful guage of prices, but not a true cost of living index, or a measure of actual inflation. (as opposed to changes in price levels and composition)
Any time a large swath of the population suddenly decides NOT TO WORK makes me wonder what the hell is going on . . .
Me too. I tend to think it has a lot to do with the undifferentiated labor problem arising in an increasingly global economy. 16-24 year olds — and many unskilled or minimally skilled older people — are now competing not with other Americans, but with a global labor pool of billions.

Until they find a way — education, specialization, etc — to increase their productive skills, they’re going to find it less and less useful to work. That’s not a problem with the US economy so much as it’s a facet of increase specialization and a permanent underclass of people who won’t specialize sufficiently to be competitive.
 
Written By: Jon Henke
URL: http://www.QandO.net
Good points, Steverino and Jon. The fact is that its harder to get a job if you don’t have specialized skills. I, for one, don’t consider going back to school to ostensibly get those skills a problem. I’d like to think its going to make the economy more competitive in the long run. Frankly, I’m encouraged that those aged 16-24 realize the world is changing at an increasingly rapid pace and are seeking out means to deal with it. If instead those same people were settling for what Barry decries as "McJobs" he’d be pointing that out instead.
 
Written By: Tom
URL: http://

 
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