The Illusory Recovery

The FOMC released its June 2013 minutes on July 10, 2013. The FOMC is roughly split with about half believing that a reduction in QE3 would likely be warranted but the other half looking for an improvement in the labour market before it would be appropriate to slow the pace of asset purchases. Some of the FOMC members believe QE should end by year-end but Fed Chairman Bernanke is a part of the group that believes that further improvement must be seen in the labour markets before they can begin to ease off on QE. 

Source: www.shadowstats.com               

The reaction of the stock market at least initially was confusion as it sold off slightly and longer dated interest rates ticked higher. Gold waffled. As the reality sunk in that the FOMC really does need to see improvement in the labour markets, the stock market and gold both turned higher realizing that the “punch bowl” of QE wasn’t about to be taken away from them. When Bernanke reassured the market about the need for continued stimulus the markets moved sharply higher overnight especially gold.

It is only appropriate that the Fed talk (or as some would call it “jawbone”) about ending QE. After all, it can’t go on forever. Or can it?

The Fed can talk all it wants but it is QE that is keeping the economy afloat. Headline GDP is running at or just below 2%. At best headline GDP can be described as anaemic and the weakest recovery seen in the past 30 years. The reality as presented by Shadow Government Stats www.shadowstats.com shows that the US economy has only briefly left recession conditions since the 3^rd quarter of 2000. The first three quarters of 2004 had very slight positive growth. Every other quarter has been in the red. It is not depression conditions but nonetheless it is low negative growth.

So what is different about Shadow Stats numbers? Shadow Stats adjusts the data for deflation and other seasonal adjustment distortions. Shadow Stats has also adjusted the data for manipulations that have been made to GDP over the years that leans to overstating actual growth. The manipulation got underway in the 1980’s following the early 1980’s recession. Manipulation accelerated in the 1990’s. Much of it is due to distortions to the headline inflation rate.

The mainstream media finally appears to be focusing on the nature of the job gains over the past year. As noted in the Technical Commentary of July 8, 2013 full time jobs over the past year have actually fallen by 26 thousand while part time jobs have soared by 881 thousand. The June employment numbers saw full time jobs fall by 240 thousand while part time jobs leaped 360 thousand. Part time jobs tend to be poor paying with little or no benefits. Jobs that are here today and gone tomorrow. This is not the sign of a robust economy.

According to the numbers from the Bureau of Labour Statistics (BLS), there are over 28 million part time workers in the US. The U6 unemployment rate jumped to 14.3% in June up from 13.8% in May. The U6 unemployment number includes discouraged workers unemployed over 6 months but under one year and part time workers seeking full time employment. The unemployment number everyone focuses on is known as U3 headline unemployment and that remained at 7.6%. The U6 number is a more complete measurement of unemployment. When one includes discouraged workers unemployed more than a year the unemployment number jumps to 23.4% up from 23% the previous month. Shadow Stats report these numbers. In looking at the U6 number and the Shadow Stats number, the situation is deteriorating not getting better.

Another number to look at is the Civilian Employment population ratio. This compares the number of people employed with the total population. Since the 2008 recession, the ratio has been languishing. The ratio grew sharply through the 1970’s through to the 1990’s when it peaked in the late 1990’s. The ratio rose as more women came into the workforce. Since 2000, the ratio has been falling and it fell precipitously in the 2008 recession. The ratio today is barely above levels seen in the 1950’s.

The poor Civilian Employment population ratio is a sign of a very weak economy. The US economy needs minimum 90 thousand full time jobs per month just to keep pace with population growth.

If I am looking at these numbers, I am sure the Fed does as well. Recovery? It is illusory. The Fed cannot afford to end QE and as many have stated QE and abnormally low interest rates appear to be here to stay for an unknown period.

Source: www.stlouisfed.org                               

26 Wellington Street East, Suite 900, Toronto, Ontario, M5E 1S2

Phone (416) 604-0533 or (toll free) 1-866-269-7773, fax (416) 604-0557

[email protected]

[email protected]

www.davidchapman.com