It’s not often you hear contrary viewpoints from mainstream commentators that survive the gauntlet of translations and redirection. That has been particularly true in the past week or so since both the GDP report and jobs report were so reassuring. That these encouraging developments do not extend to any deeper meaning is left out, and has thus been the focus of these oddities lately.
First, the narrative in Europe has been nothing but positive since the summer. Absence of further contraction is taken as evidence of recovery, demonstrating that Europe no longer has any sense of what a recovery actually is or might look like. As is usually the case, an economy that simply pauses in its downward slope will more likely than not return to that dire state rather than spontaneously erupt in robustness.
That realization was echoed by former FDIC Chairman, now CEO of Fifth-Third Bank, William Isaac as he let the veil slip in the brinksmanship surrounding the “Volcker Rule”:
This is particularly worrisome with the economy at a time when the economy in the U.S. continues to limp along and in Europe appears to be sliding back into recession.
Nothing will peel back the veneer of apparently successful cross-continental monetary policy like threatening a big bank’s profit stream.
If that wasn’t enough of a kicker, recently proclaimed Nobel Laureate Eugene Fama, not exactly a heterodox member, announced he too was unimpressed with recent “strength”, particularly last month’s reassuring Establishment Survey.
I am not reassured at all. The jobs recovery has been awful. The only reason the unemployment rate is seven percent, which is high by historical standards in the U.S., is that people gave up looking for jobs.
The “father of efficient markets” might have been suggesting something else for recent market prices. In any event, it is the recent occurrence of actual contraction in the labor force that belies pretty much all of the revelry surrounding the latest statistical machinations.
At the end of November, CNN conducted a survey that saw the percentage of those that “say things are going well” in the US fell 9% from February, to 41% – that was the lowest reading since well before QE 3&4. Further, and perhaps far more to the point, those that believe the “economy is still in a downturn” now outnumbers those that feel a recovery by a large margin, 39% to 24%. That is, again, a marked deterioration from April.
There are a number of factors to consider here, but the implications of each are very much connected and even reinforcing. It could be the mortgage market’s collapse driving these statistics, as that would certainly make a negative impression. Or the related increase in interest rates. So while not conclusive, these oddities taken together offer little to no support to the mainstream, Establishment Survey narrative. At worst, they openly contradict it.
An alternate means of measuring employment market conditions is the JOLTS data series, also prepared by the BLS. The rate of gains in job openings and hiring activity has been extremely weak, looking more like 2007 than a robust recovery. The problem even with that comparison is that there has been such a structural shift in the rate of labor market turnover that even comparable growth rates are very misleading; the absolute numbers are, particularly when factoring population growth, rather worse than disappointing.
With that in mind, an obvious oddity appears right at June. Suddenly and spontaneously, the rate of hiring activity jumped rather significantly, diverging with the rate of job openings. That could very well have been a lagged reaction to the inventory mini-cycle as it built through the middle of the year, but on closer inspection the last few months really stand out; particularly when viewed as non-adjusted data.
The seasonal pattern is obvious, with a peak in hiring activity taking place in June of each year. Unfortunately, June 2013 fell well-behind the pace of expansion set in 2010. In fact, June’s hiring rate was not just behind the pace, hiring was actually lower in June 2013 than June 2012 (-0.8%). That would be consistent with the Household Survey and even the pace of job openings we have seen recently. It would also help explain the dramatic drop in the size of the official labor force over these same months.
And then, as the chart above shows, the rate of hiring simply took off. That has created an obvious distortion in the regular seasonal pattern. It’s as if the Establishment Survey has somehow caught up with the JOLTS series.
If you dig into the BLS calculation methods you find out that is exactly the case. The BLS benchmarks JOLTS to the Current Employment Situation (CES) figures, otherwise known as the Establishment Survey. From the BLS:
JOLTS total employment estimates are benchmarked, or ratio adjusted, monthly to the strike-adjusted employment estimates of the CES survey. A ratio of CES to JOLTS employment is used to adjust the levels for all other JOLTS data elements.
The following formula is used to create a CES intrusion into the JOLTS survey results, making the Establishment Survey the benchmark for JOLTS subdata.
Once calculated by creating a ratio of the CES results to the weighted summation of individual JOLTS data “panel”, the benchmark factor (BMF) is then used to “anchor” the JOLTS survey to the CES. Again, the stated reason is that the Establishment Survey is taken from a much wider sample, adjusted appropriately according to accepted statistical theory, and thus gives us the most “precise” estimate of employment changes.
That, however, makes the divergence between hirings and job openings that much more curious. If I am correct in that the Establishment Survey is overcounting employment, and that such overcounting is then being transmitted into JOLTS via this ratio-adjusted benchmarking, the pace of hirings is actually pretty bad (as would be suggested by the seasonal peak). But the pace of job openings is then far, far worse.
Finally, I don’t find much coincidence that all of these oddities take place since June. Getting back to the other potential factors cited above, the taper summer is likely to have left more than a passing imprint on the economy. Whether it is lack of mortgage finance, higher interest rates or just general financial perturbance, it is at least intuitive to figure a struggling or worsening economy to accompany such disruption. To figure in an economic acceleration simply doesn’t align with the facts of the labor force, let alone the scale of the growing inventory disaster.
Click here to sign up for our free weekly e-newsletter.
“Wealth preservation and accumulation through thoughtful investing.”
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, contact us at: jhudak@4kb.d43.myftpupload.com
Stay In Touch