 | Is the unemployment rate lower than it should be? |
|
| Posted Under: Data Watch • Employment |
|
Is the unemployment rate lower than it should be? Ben Bernanke is incredulous; He argues that unemployment has fallen more than GDP suggests it should have. Others suggest that declines in the labor force are artificially reducing the unemployment rate.
So, while no one denies that private sector jobs have grown for 26 consecutive months, they argue that this doesn’t matter because the labor force participation rate (LFPR) has fallen to 63.6%, its lowest reading since 1981. This low reading is a combination of two things – a flattening in the labor force and a growing population. If the LFPR were at the pre-Obama, or pre-recession peak, the unemployment rate would be significantly higher, possibly 11%.
While we will not argue with the math – the unemployment rate really would be higher if the labor force were bigger – we do argue with the conclusion. The US economy is much better than an unemployment rate of 11% would suggest and the decline in the LFPR is not a “new” development.
The LPFR has been trending down since 2000 (see chart). There are three reasons for this. First, the population is aging and as it does a smaller percent of the population is in the workforce. Second, the peak in 2000 was partly due to the dot.com bubble, but also a huge reduction in government spending relative to the economy. Third, the female participation rate reached a peak after climbing for more than 30 years.
The most important reason is the aging population. In 1975, the total US population grew by 1%, while the population of those 65+ years old grew by 2.9%. In 1999, the 65-years-or-older age group grew just 0.5%. Since then the population has been aging rapidly and in 2012 (65 years after 1947), the 65+ cohort will grow 3.5%, while the population grows just 0.9%.
As the chart shows, this trend in the number of people 65+ years old is a mirror image of the labor force participation rate. The participation rate is falling as the number of people who reach retirement age rises. It’s not a mystery. Moreover, because people are living longer these days, the share of that older population continues to increase relative to historical norms. In other words, all this fretting about the LFPR is overdone. The population is aging…that’s the number one thing driving this data.
|
|
| | Producer Price Index (PPI) declined 0.2% in April |
|
| Posted Under: Data Watch • PPI |
|
Implications: Due to falling energy prices, overall producer prices were down 0.2% in April, coming in lower than the consensus expected. That’s good news for companies making purchases, but no justification for another round of quantitative easing. “Core” prices, which exclude food and energy, and which the Federal Reserve claims are more important than the overall number, were up 0.2% in April. The increase in core prices was led by pharmaceutical drugs which accounted for about a quarter of the “core” PPI increase. Core prices are now up 2.7% from last year, which is faster than the overall PPI. In the past three months, the core PPI is up at a 2.5% annual rate while overall prices are up at a 0.6% rate. We don’t expect that to last. Due to loose monetary policy, these inflation measures will head higher later this year. Taking a look further down the producer pipeline, core intermediate goods prices are accelerating, up at a 7.5% annual rate in the past three months, although core crude prices are down at a 3.7% annual rate in the same timeframe. Be careful of the stories you may read in the coming weeks about how the Federal Reserve was right all along and that inflation is not a problem. By later this year, the conventional wisdom will realize this was temporary.
Click here for a PDF version.
|
|
| | Trade deficit in goods and services came in at $51.8 billion in March |
|
| Posted Under: Data Watch • Trade |
|
Implications: Imports and exports both rose to new record highs in March, but imports increased more than exports, so the trade deficit expanded. Not only was the level of imports the highest on record, but the increase in imports was the most for any month on record, in part a result of a bounce back in shipments from China following Lunar New Year celebrations. The best news in today’s report was that exports to Europe, including the Euro area, hit a new all-time record high. (This is true even if we exclude Germany.) The large depreciation in the exchange value of the dollar in the past decade means the US is a much more attractive place from which to export. That’s why many foreign automakers are increasingly using the US as an export hub. Because productivity is so high, unit labor costs are low in the US relative to other advanced economies. Nonetheless, reviving US consumers still like imported goods, which will boost imports. On net, trade was a neutral factor for real GDP in Q1, but should be a slight drag on growth in Q2. In other trade news today, import and export prices reflect the recent lull in inflation. Import prices were down 0.5% in April and are up only 0.5% from a year ago. Excluding oil, import prices were unchanged in April and are up 0.7% in the past year. Prices for exports are similarly quiet, with overall prices up 0.7% in the past year and 1.2% excluding agriculture. However, given the stance of monetary policy, we expect these products to show more inflation later this year. In the labor market, new claims for unemployment insurance dipped 1,000 last week to 367,000. Continuing claims for regular state benefits fell 61,000 to 3.23 million, the lowest since July 2008. These figures suggest faster payroll growth in May then in March/April.
Click here for a PDF version.
|
|
| | Dead Cat Bounce for Socialism |
|
| Posted Under: Europe • Monday Morning Outlook |
|
|
The Social Welfare State is dying. Like the Berlin Wall and the Iron Curtain, the cradle-to-grave social welfare experiment must eventually collapse. A system of taxing work and profits, while subsidizing leisure, sloth, and retirement, must eventually fail.
The end of the Social Welfare State is painful for many, and it will not end quickly or quietly as the elections of this past weekend prove. Francois Hollande, a Socialist, was elected president of France, while Greece saw a surge in votes for “anti-bailout” political parties in parliament.
These elections are described as blows against “austerity.” They are also seen as anti-German. Germany resisted bailouts and pushed spending cuts.
In theory, a rejection of austerity could be a good thing. Some people include tax hikes in the concept of austerity and avoiding tax hikes would be a good thing for Europe. France has a top income tax rate of 45%, a wealth tax of 0.5% and a Value Added Tax (VAT) of 21.2%. Greece has a top income tax rate of 45% and a VAT of 23%. These burdensome tax rates hinder growth, investment and work effort and still don’t cover all the spending.
To solve the deficit problem, Francois Hollande wants to raise France’s top income tax rate to 75%. Greece’s “anti-bailout” parties, mostly on the left, also want higher taxes on the upscale, plus defense cuts. The Greek military helps break up domestic riots, so this is a self-serving demand.
So, in reality, French and Greek rejection of austerity does not mean policies that would enhance long term economic growth. Instead, it means they want to temporarily pull the wool over their own eyes, resist the obvious need to reduce government spending, and just hope for the best.
This chapter of the French story will not end well. The country has already gone much further along the road to socialism than the US, with general government spending equal to about 56% of GDP, very near the highest of any advanced or emerging market in the world. Greece, at 49%, is not far behind. Yet, voters are doubling down.
Markets already sense the problems this will cause. The Euro is weaker and stock prices are down around the globe. Many fear that pressure on the European Central Bank to buy more Euro debt and help avoid austerity will create inflation. This is happening despite the fact that Hollande was a huge favorite to win and this should have been built into the market already. It was the ease of victory, combined with the vote in Greece that made the day feel even more anti-market.
But even easy money would ultimately be a dead end, leading to higher interest rates and less capital investment. Anyway, the Germans would never go along with a euro as weak and inflationary as many in Greece and France want. And Germany has huge leverage: if the ECB gets too loose, only Germany could leave the euro, go back to its old currency, and not get hammered by financial markets.
In the end, this is a battle the socialists are simply not going to win. Greece is too small to be convincing; France is about to show the world what doesn’t work.
With any luck, after dabbling in folly, France will reverse course quickly. Maybe Hollande himself, not an unintelligent man, will realize the mistake of fighting the end of the social welfare state. The citizens of Europe who think austerity is unnecessary are about to get a lesson in reality. In the end the only way out is more capitalism.
And this brings us to our most important point. Financial markets in the US moved abruptly to a “risk off” trade as these election results were finalized. Stocks sold off and bonds rallied. But those who think these elections will hurt the US are wrong. The end of the social welfare state in Europe is a precursor for the US. It’s a Dead Cat Bounce for Socialism.
Click here for a PDF version.
|
|
|
These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
|
|
Archive
Tags
|