Not Even Out of the Frying Pan Yet

06/06/2012 10:00 am EST


John Mauldin

Chairman, Mauldin Economics

Once again, we're forced to revisit the adage about lies, damn lies, and statistics. Conventional wisdom is usually an oxymoronic term when dealing with economic analysts, observes John Mauldin in Thoughts from the Frontline.

The US unemployment numbers for May were released last week, and they were rather dismal. Mainstream economists were expecting something on the order of 150,000 new jobs, but they came in sharply lower at 69,000. March and April estimates were revised down 50,000.

As long-time readers know, I pay as much or more attention to the direction of the revisions than to the actual monthly numbers, as the direction of the revision is a reasonable leading indicator. And what it indicates is what I was writing four months ago: we are in for another summer of poor jobs growth.

With the revisions, we have had the first back-to-back sub-100,000 new jobs months since last summer, with the average gain for the last three months a poor 96,000.

The unemployment rate rose to 8.2%, as the labor force rose a very strong 642,000. This is why I wrote, at the beginning of this recession some four years ago, that employment would take longer to come back this cycle. That is because of the way they count employment.

If you have not looked for a job in the last four weeks, you are not counted as unemployed. The rise in the labor force is largely due to the growing number of people now looking for jobs, as those on extended unemployment benefits are beginning to come to the end of their two-year benefits period in fairly large numbers each month.

As more people look for a job, the statistical reality is that it takes more new jobs to move the unemployment number down. And with numbers like this month's, that means the unemployment rate will start to march back up. That is not something anyone wants, least of all politicians, who are fond of taking credit when the number of jobs rise but try to change the subject when unemployment climbs.

The more realistic unemployment number would be one that counted people who are unemployed, but would take a job if they could get one. While economists can argue how to actually come up with that number, nobody (without a serious political bias) would argue that it is less than 10%, and some would argue it's north of 12%.

And the duration of unemployment is now back to a median time of over nine months, with that number sadly rising as well. It is just taking longer to find a job if you don't have one.

CNN Money did a story last month with the note that, "...there are far more jobless people in the United States than you might think. Last year, 86 million Americans were not counted in the labor force because they didn't keep up a regular job search.

"While it's true that the unemployment rate is falling, that doesn't include the millions of nonworking adults who aren't even looking for a job anymore. And hiring isn't strong enough to keep up with population growth. As a result, the labor force is now at its smallest size since the 1980s when compared to the broader working-age population."


The household survey (which is different from the establishment [or business] survey) showed the creation of 422,000 jobs. We get the unemployment percentage (of 8.2%) from the household survey. But you can't really look at the monthly numbers on the household survey, because they fluctuate wildly.

"Change in the adjusted household survey over the last five months: +491,000, +879,000, -418,000, -495,000, +400,000. That nets out to +857,000, little different from the establishment survey's 823,000. Further evidence that one should look at the adjusted household numbers as a longer-term check on the establishment survey and basically ignore the monthly changes," comments The Liscio Report.

The interesting thing to me in the household report was that the number of part-time jobs was up 757,000, which is far larger than the rise in the number of employed. Full-time employment actually dropped by 266,000. The broader measure of people who are unemployed or underemployed (part-time but wanting full-time work) is now back up to 14.8%. The Gallup Poll people, using a different survey basis, show an 18% underemployed rate.

But why should we worry? BusinessWeek comments: "The jobless rate in the US could drop to as low as 6% by the first half of 2013, a bigger decrease than most economists currently project, according to research from the Federal Reserve Bank of New York. The relationship between the number of Americans newly unemployed and those recently finding work indicates joblessness will continue to decline, according to economist Aysegul Sahin."

Such scholarly work should help Sahin to land a job with the White House on the President's Council of Economic Advisors. (Although, to be fair to the Fed, their more consensus view is that unemployment will still be 7.4% to 8.1% in the fourth quarter of 2013.)

Perhaps the key driver of the US economy is consumer spending. And consumer spending requires consumers to have income. But this month's survey and the revisions to recent reports shows that hours worked are down slightly and wages are not keeping up with inflation.

Total payrolls were down 0.3% for May, which is just a killer for consumer spending. GDP for the first quarter was revised down to 1.9%, and it looks like this quarter may not be any better or may even be worse, despite the higher expectations of mainstream economists.

But I suggest that you not take much comfort from consensus forecasts. There are certain analysts who I can almost always count on to be wrong. And they get there with the aid of a large number of graphs and charts and words to prove their points. But being consistently wrong can be useful, and I appreciate the effort it involves.

However, there is wrong and there is just really bad. The Blue Chip economics consensus has never forecast a recession. And they largely miss recoveries. Essentially, they always forecast a continuation of the current trend. As a group, they are largely useless. They are not even a good contrarian indicator.

My friend James Montier (now of GMO) has long had fun with the poor track record of consensus economic forecasts. This graph pretty much says it all.

Click to Enlarge

Of Recessions and Deflation
Recessions are by definition deflationary. Deleveraging events are also deflationary.

A recession accompanied by deleveraging is especially deflationary. That is why central banks all over the world have been able to print money in amounts that in prior periods would have sent inflation spiraling upward. This drives gold bugs nuts as they see the money being printed, but they are not factoring in the velocity of money.

If the velocity of money were flat, inflation would be quite significant by now. But velocity has been falling and is going to fall even further. The US Fed and the ECB are going to be able to print more money than we can imagine without stoking least for a while longer.

One of the champions, for a rather long time, of the deflationary outlook has been my friend David Rosenberg (formerly chief economist at Merrill and now with Gluskin Sheff in Toronto). He has been talking for years about a target of 1.5% for the ten-year US bond.


I noted that in a phone conversation to Rich Yamarone, the chief economist at Bloomberg, and he said he believes we will scare 50 basis points before we are through. To which Rosie replied in a later text, "He's nuts."

Since I was thinking about bond yields, I called Dr. Lacy Hunt (one of the more brilliant economists in the country, and not just in my opinion). He has been forecasting interest rates for a long time and been the guiding light at Hoisington Asset Management, which has established perhaps the best track record I know of for bond returns, if a tad volatile.

They have been long bonds for a very long time, which has been the correct position, if a difficult and lonely one. Most bond managers think rates are set to rise. But not Lacy. He thinks we will get close to 2% on the 30-year bond and has said so for decades.

Dr. Gary Shilling wrote his first book, called simply Deflation, in 1998 and followed it up recently with another great work, titled The Age of Deleveraging. He first went long bonds in 1982, which has been one of the great trades of the last 30 years. He lists a whole host of reasons for a deflationary period over the next few years.

The argument for deflation is rather straightforward. The boom in the US and much of the world from 1982 until 2008 was partially the result of financial innovations and massive leveraging. That process has come to its end, and the private sector is deleveraging and will do so even further as the economy softens and we slip into the next recession

Governments are coming to the end of their ability to borrow money at reasonable rates in Europe, and soon in Japan and eventually in the US (and that time is not as far off as we would like). I described the whole process in my book Endgame. Assuming the US government deals with its coming deficit crisis in a realistic manner, the results will be deflationary.

The next big deflationary force is the slowing of the velocity of money. It has been falling for five years, pretty much as I wrote it would, back in 2006. (I was writing about the velocity of money at least as far back as 2001, and probably earlier. It is a very important concept to grasp.)

We are now close to the historical average velocity of money, but since velocity is mean-reverting, it will go well below the historical average. This process takes years; it is not something that is going to end anytime soon.

A slow-growth, Muddle-Through economy is deflationary. High and persistent unemployment is deflationary.

Absent some new piece of data that I can't see now, we are in for lower bond yields in the US. Rates are going lower and are going to stay low for longer than any of us can imagine.

I think the Fed will respond to the government acting in a fiscally responsible manner, which is inherently deflationary, by fighting that deflation with the only tool it has left—outright monetization of debt. They will call it something else, of course, but that will be the actual outcome.

And they will be able to monetize more than you think they can without causing a repeat of the 1970s. Eventually it will catch up to us, as there is no free lunch, but they are betting they will be able to reduce some of the threat of actual inflation by cutting back on the money supply and raising rates.

But we are years off from that. So, yes, at some point inflation will be back.

Anybody who says they know the timing is a lot more confident in his/her crystal ball than I am. Mine is rather cloudy on this topic. But I think I can see out a year or so, and it looks like continued low rates and deflation.

By the way, just to appease the gold bugs among my readers, given my deflationary call: I will note in passing that solid gold stocks were up hugely during the deflationary Great Depression of the 1930s. Even with the dollar on the gold standard. Just saying.

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