Three Graphs Tell the Story …

… About the US economy, Hidden Amidst the Noise of the Jobs Report

Fabius Maximus (October 06 2014)

Summary:  We’ve reached a critical point in this business cycle. We enjoyed the years of fiscal and monetary stimulus; now comes the dismount. Only after the stimulus ends will we learn the true strength of our economy. Today we look at the monthly jobs report, perhaps the single most important indicator. Three graphs tell the story, cutting through the fog of confusion spread by the news media.

Why We’re Ignorant and Confused

Reports about the monthly jobs report illustrate why we’re confused and so often ignorant about important aspects of our lives.

1. We get numbers without context. Raw numbers by themselves tell us little; the percent change has meaning. Also useful are descriptions of the trend and adjustments for inflation (vital when looking at long-term changes).

2. We get detailed analysis of noise, lavish attention to tiny monthly fluctuations – changes usually smaller than the data’s error bars.

Instead let’s focus on the big things. Three graphs tell the story about the September jobs report {1}. I have been showing readers these numbers for years. The first big story is that these trends have not changed.

Before we start, remember the price paid for this expansion. Five years of near-zero interest rates (since December 2008) – ending in Q2 or Q3 of 2015). Three rounds of quantitative easing – ending this month. And a mind-bending expansion of the Federal public debt – $809 billion added during the fiscal year just ended (a 6.8% increase, equal to 4.7% of GDP) {2}. That the economy needs such large stimulus in the sixth year of an expansion is unprecedented (usually by now the economy has overheated from too-fast growth) – and is the second big story.

Now comes the dismount, when we must dial the stimulus down to zero. Understanding the trend helps us prepare for what might happen next.

The Weak Good News: More Employed

Steady slow growth at about two percent now in its fourth year. We’re not in a recession. No signs of the often-predicted acceleration.

The Bad News: Percent Employed

The percent of people in their prime years (16 to 64) who are employed peaked in 2006, fell from 2007 to 2011, and has only weakly recovered since then (back to the level of 1984, reversing much of the long increase from women entering the work force). There are many factors affecting this, but the trend since 2006 probably reflects weakness not strength in the US economy.

More Bad News: Wages

For several years conservatives have confidently predicted that the economy would soon overheat – with wage inflation coming!  We wish it were so – that employers would share their record high profits, resulting from decades of productivity gains. Here’s a rough estimate of year over year changes in the average American’s real wages: hourly earnings for private sector production and non-supervisory workers deflated by the CPI of urban wage earners.

The bottom line: workers real wages fell for two years. Since the start of 2013 they’ve grown slowly. Very slowly. No signs of the often-predicted acceleration. This is bad news when occurring so late in an expansion. If we’re not getting strong real wage growth in the fifth year of an expansion (that is, an old expansion), we might not get it before the next recession.




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