COOKING THE BOOKS

February 7, 2011

The Obama Administration is proudly announcing the decline of the unemployment rate. The Bureau of Labor Statistics last Friday announced that the unemployment rate fell from 9.4 to 9.0 percent, the lowest figure since April, 2009. What what about the "real" numbers?

The January employment report was not complete. In fact, the new way the Labor Department has for determining the percentage of unemployed is now nothing but a sham.

Consider this: Abominable winter blizzards across the country caused 886,000 workers to report “not at work due to bad weather,” according to the BLS. This is 600,000 more than the normal 300,000 not at work for the average January of the past decade.

So the bad weather has distorted the numbers. The actual 36,000 increase in nonfarm payrolls and the 50,000 gain in private payrolls really don’t have a snowball’s chance at being accurate. The 1 million people in January who wanted a job but didn’t look for one because of “other” reasons hints again at the bad-weather distortion. So does the 4.9 million jump in the part-time workforce.

As for the 9 percent unemployment rate, it’s not likely to last as more people are recorded reentering the labor force in the months ahead. The household employment survey (on which the unemployment rate is based) increased 117,000 in January, following a near 300,000 gain in December.

On the plus side (if anything can be believed in these numbers), average hourly earnings increased by four-tenths of 1 percent -- a much bigger gain than in recent months. Over the past year, wages are rising 1.9 percent.

But here’s a key point: Manufacturing jobs in January rose by nearly 50,000. That’s consistent with the blowout ISM manufacturing report for January published a few days ago. Manufacturing has been the biggest surprise in the recovery. Additionally, the ISM non-manufacturing services report was also gangbusters for January.

These reports are more accurate and more significant than today’s jobs calculation. And if you piece them together with record-breaking profits, which are the mother’s milk for stocks, business, and the whole economy, it’s hard not to conclude that the pace of recovery is actually picking up steam -- despite the lackluster jobs performance.

The downside of the upside is mounting inflation pressure. Both ISM reports registered very strong prices paid. Those outsized price increases are picking up the huge commodity-price increases that Ben Bernanke continues to ignore.

Bond-market rates have moved up to 3.64 percent for the 10-year Treasury and 4.73 percent for the 30-year. Those rising yields are signaling inflationary growth. Along with soaring commodity prices, the abnormally steep Treasury yield curve is signaling the Fed to stop creating new dollars with its QE2 pump-priming.

Right now, stronger economic growth, higher profits, and rising inflation continue to help the stock market, which actually increased Friday after the weird jobs report. But the risk here is that reported inflation for the CPI may rise faster than anyone thinks. And that could take a bite out of stocks and the recovery.

There has always been the trend that layoffs at companies which sell stock contributes to a buying frenzy, so stocks generally go up with workers are handed pink slips. But even this doesn't tell the true story of unemployment.

Right now, there are more than 4 to 4.5 million who have fallen off the rolls at the Labor Department due to more than two years being out of work. Another 8 million or more have just given up after years of not being able to find full time work.  Couple these with the millions of "under employed" or those with two, three or even four part-time no-benefits employment and you could near accurately arrive at a rate nearing the 20 percentile mark. One wonders what the numbers will look like when another million young people try to enter the work force following graduation from college this spring.

Writing in The Atlantic on January 11th economist Don Peck, said that in the months to come a particularly scary specter of 'structural unemployment' will loom around Americans. This is simply joblessness without end for some large group of people who want work, but can't find it. He said: "This will be a pestilence that slowly eats away at people, families, and, if it spreads widely enough, the fabric of society. Indeed, history suggests that it is perhaps society's most noxious ill."

Election mode is quickly coming into being and President Obama wants four more years. This can only be possible if the unemployment rate drops to around 7 percent before November 6, 2012. That may only happen if his Labor Department can successfully cook the books before the real facts can be proven.


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