Posted on 06/27/2021 6:01:59 AM PDT by blam
Sometimes new data can shed light on an uncertain situation, especially in financial markets. Other times it simply adds to the confusion. Such was the case with the most recent U.S. employment report released June 4 for the month of May.
The analyst world was glued to their news feeds, anxiously awaiting the latest report. The result was — bafflement.
The report showed job gains of 559,000. That’s a strong number, but it was below expectations. The market was looking for 670,000 jobs or higher. While strong April gains were revised up slightly, the stronger March gains had earlier been revised down by 131,000 jobs over the course of April and May.
The overall impact of the March-April-May data was a cooling off in new job creation.
The unemployment rate for May declined from 6.1% to 5.8%. That sounds like good news until you notice that the reason for the decline was not strong job creation but rather a decline in labor force participation.
That statistic declined from 61.7% to 61.6%; not a material drop, but still part of a long-term decline that has moved labor force participation back to levels not seen since the 1970s.
Simply put, the overall size of the labor force shrank.
The Glass Half Empty
You can be unemployed in the traditional meaning of the term without being counted as unemployed by the Labor Department. The difference has to do with whether you are actively looking for a job or not. Only the former are officially counted as unemployed. The problem is that the ranks of the latter are growing.
There are always some in the prime-age working population (ages 25 – 54) who are not looking for jobs because they are homemakers, students, early retirees, or are undergoing various life transitions. Still, the percentage of potential workers who have dropped out of the labor force is disturbingly high.
Some have given up looking for jobs because they’re sure they can’t find any that match their skills or interests. Others are content to collect the generous unemployment benefits the government keeps handing out. Some are still living in fear of COVID and don’t want to return to the workplace.
I’m not passing judgment; I’m just making the point that a low unemployment rate doesn’t mean much when it’s driven by a low labor force participation rate.
We have an army of perhaps ten-to-twenty million prime-age workers who don’t have jobs and aren’t looking. As long as that slack in the labor market is out there, the official unemployment rate doesn’t tell the whole story.
So, the bottom line on the May employment report was, meh. It wasn’t horrible, and it wasn’t great. It did point to persistent slack in labor markets and possible slowing growth. It did not point to inflation or anything close.
The Inflation Narrative
Since late last summer, the main driver of rates has been an inflation narrative. The narrative is straightforward:
The economy is recovering. Unemployment is declining. Employers can’t find enough workers. Wages are going up to attract help. Stimulus spending is coming by the trillions of dollars. The Fed is printing money. The economy is pushing up against capacity constraints.
Add it all up, and inflation is right around the corner. Therefore, rates must go up. And when rates go up, the price of gold goes down.
Markets have adopted this narrative. The yield-to-maturity on the 10-year Treasury note went from 0.508% on August 4, 2020 (about when gold peaked) to 1.745% on March 31, 2021. Gold prices went from over $2,021 per ounce to $1,686 per ounce over the same period. That’s a 16.5% drop in gold prices.
What if every part of the economic narrative is wrong?
The Numbers
The economy was bound to recover from the pandemic recession of 2020, the worst since 1946. But, it appears the recovery is now running out of steam. For the record, the economy was weak before the pandemic hit.
What if that weak growth trendline is now returning to form?
The unemployment rate is declining, but real unemployment is not. We still have 7.6 million fewer jobs than before the pandemic, not counting the 10 million or more prime-age workers out of the labor force as described above.
It’s true that wages are going up in some service industries such as restaurants and that workers are hard for some businesses to find. (McDonald’s is now offering $35,000 per year plus benefits and training for entry-level hires).
Still, overall wage levels are not rising significantly, and slack in the labor market is producing a powerful disinflationary overhang.
It’s the Velocity, Stupid
Money printing is practically irrelevant because the velocity (or turnover) of money is still declining. What good is new money if the banks just give it back to the Fed as excess reserves, so the money is never spent or lent?
Fiscal policy and handouts are not producing stimulus because debt levels are so high (the U.S. debt-to-GDP level is now 130%, the highest ever). Americans respond with precautionary savings and deleveraging.
Data shows that 75% of the government handouts have either been saved or used to pay down debt (economically the same as saving). Only 25% have been used for consumption. That’s a pathetic amount of bang-for-the-buck.
We are seeing some supply-chain disruption and capacity constraints, especially in semiconductors, which affects automobile manufacturing. Still, manufacturers have not been able to pass through those constraints in the form of higher consumer prices.
Inflation remains low once base effects from last year’s deflation are stripped out. Those base effects will disappear in the third quarter when the year-over-year comparison looks at the 2020 recovery rather than the recession.
Inflation is dead in the water.
I know that analysis puts me in the minority, but that’s OK; I’m used to that. I was also in the minority when I predicted Brexit and that Trump would win the 2016 election. The bottom line is, the consensus is often wrong.
Look to the Bond Market
The bond market already senses this, and so does gold. Rates peaked on March 31 and have been coming down since, albeit with the usual volatility. The rate on the 10-year Treasury note is 1.487% as of this writing, some 0.20% below the peak.
That’s a huge drop given how low rates are overall. The bond market is signaling that the inflation narrative is wrong.
Gold is saying the same thing. Gold hit an interim bottom of $1,678 per ounce on March 8, 2021, and has been trending up ever since. Gold is trading at $1,774 per ounce today and had a recent interim high of $1,918 per ounce on June 1, 2021.
Again, gold is signaling that the narrative is wrong, growth is slowing, and rates are coming down. That makes gold more attractive to asset allocators because gold competes with notes for investor dollars.
Stocks are forward-looking in theory, but they do an awful job of getting the forecast right in practice. Stocks missed the coming crashes of 2000, 2007 and 2020. They’ll miss the next crash too (until it’s too late to get out whole).
Bonds and gold are much better indicators of where the economy is going.
The signals are clear. The economy is slowing, labor markets are weak, disinflation and even deflation are on the horizon, rates are going down, and gold prices are at a great entry price.
Reality is catching up with the narrative. If you understand what’s going on, you’re more informed than the “experts.”
Paying people not to work skews the whole equation.
“For the record, the economy was weak before the pandemic hit.”
What?
Good article to counter the Inflation argument. During the Obama years, we were on “Slowroll” we bought equipment during Trump Administration with our savings. Back to Capital Strike for xiden.
No one who does the family grocery shopping would ever say this. Prices have definitely gone up - and packaging has become smaller.
I bought a "family meal" at the grocery store the other day - usually feeds two of us easily, opened it up and it was barely enough for one.
We went to the California Pizza Kitchen the other day - it was supposed to open at 11:00 and it was 11:15 and closed - shopped more, came back at 11:45 - still closed, even though the hours said "open at 11:00" - finally, at noon, someone came to the door and said they didn't have enough staff to open up and were hoping to get more people to come to work - and to come back in three-four hours.
New normal. High prices, less product, businesses short-staffed.
Fewer productive people, less real wealth, more dollars chasing scarcer goods. That is inflation. Worsened by government policies that purposely disrupt energy,mining transportation and manufacturing. Full impact by 2023. If it had not been for the remarkable almost miraculous increases in productivity and wealth generated by the widespread deployment of the silicon chip in the world, there would be the most severe series of depressions.
One expert predicts inflation, and maybe even massive inflation. Then this guy comes along and predicts little inflation, and maybe even deflation. And everyone has a good argument to back up his claims.
And that’s what makes economics such zany fun. In any other discipline you wouldn’t see such wild contradictions. But in economics it’s almost expected.
“Data shows that 75% of the government handouts have either been saved or used to pay down debt (economically the same as saving).”
I doubt it.
New normal. High prices, less product, businesses short-staffed.
Another thing to factor in is that people hate working with masks on — especially at the low end of the wage scale.
....if it had not been for the remarkable almost miraculous increases in productivity and wealth generated by the widespread deployment of the silicon chip in the world...
A depression would be bad materially. But I think it would help to wring a lot of the foolishness out of society.
So gas and food prices will decline? What about unprecedented peacetime government spending injecting trillions into the economy and increasing debt servicing costs? What happens with the real estate bubble?
It appears we are going to have significant COLA increases for SS and federal pensions. The budget deficit will only increase.
Connector I was looking at two weeks ago; $16. Decided to buy it yesterday; $23. No inflation?
Also, they are right about the declining workforce. The millennials represented a substantial drop in the birthrate and Gen Z (ages 9-26) is even smaller.
I think the birth rate and the cost of living have an inverse relationship. Cheaper costs, more children. More expensive costs, fewer children. This is why the rest of the socialist world is at the point of no return.
Well, no.
I learned Friday that pent up need has produced such a surge that the various entities involved in the production of a single product can’t handle the load. Deliveries are now delayed to November because of the increase and in the non timely availability of various component materials.
Coupled with the contractual dilemma of making a sale with such known delays are the increase in prices of many components. And, there is the problem with the skilled workers required. The surge has resulted in everybody working at capacity when there no excess labor availability.
It appears we are going to have significant COLA increases for SS and federal pensions. The budget deficit will only increase.
I have asserted for some time that interest rates are being kept artificially low. Why? Simply because they cannot be allowed to go up. If they do, the deficit will become unaffordable and the Entitlement State will grind to a halt. If that happened, then you would see riots like we’ve never seen in our history. Effectively, a Civil War 2.0 That can’t be allowed to happen, so we are keeping about 1/3 of the population on the dole.
The rub is that the situation is not improving. Labor force participation is going down. Intuitively people know something is up and many would rather suck on the Government teat than work. That will eventually cause some kind of collapse. Before then, however, the “productive” people will start charging a lot more for their services. Kind of like what we are seeing now.
The good thing with something simple like inflation is you don’t need to rely on experts, just look at where the money is flowing.
Long term bond prices and interest rates are still low. The folk who have billions to spend are still expecting inflation to be 2% or lower over the next decade.
The best thing about the free market is if you think these decisions are wrong, you can put your money on that bet and become very, very wealthy if inflation does hit 10%.
A business owner told me recently that people who come in, especially the younger generation - looking for jobs often tell HIM what hours they’re going to work - he said they refuse to work on Friday nights or weekends, when he most needs help.
No wonder I’m starting to see more and more retirees (my town is full of them) - bagging groceries, at fast food joints, working on the golf course (my elderly neighbor works at a gym at the front desk and loves it) even waiting tables. And, good for them.
The average person is going to see the money they have to spend on food decrease if even a fraction of the energy sector changes desired by the Democrats take place. Also, the energy costs associated with moving food long distances is going to increase, which is going to get passed on to the consumers, raising prices.
It looks like we will have yet another huge spending bill (infrastructure). Exactly where is that money coming from? They have to print it to devalue to dollar so that interest on debt can be paid with less expensive dollars.
We are getting triply screwed. We have to pay for all this government spending today in every purchase we make because of a weak dollar (inflation), and we have to pay for all this government spending tomorrow in more taxes (guaranteed to happen under Xiden) and we have to eventually pay the principle of all that debt. (We ain't paying that down now.)
Went to the restaurant on Friday at 3. Sign said closing at 4. They had no cook for the evening. My wife noticed the staff on duty was older folks, meaning 40 or older.
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