In 1994, for the cited reason of statistical integrity, the Clinton Administration decided to exclude individuals who had given up looking for a job, after one year of trying, from government unemployment measurements. Today, if those individuals are added to (a) officially unemployed persons, (b) those who had unsuccessfully attempted to get a job in the last 12 months and (c) those that only have part-time employment status, the real measure of unemployment is closer to 18%, not 7.20% as reported on Friday.
In the past, given the intrinsic correlation between Lines U-3 and U-6 in Table A-12 of the Labour Department’s monthly jobs report on one hand and alternative measurements including 12-month-plus “discouraged” workers on the other, analysts have not found it necessary to read beyond the publicly-announced unemployment numbers. But, as the alternative measurements of the domestic labour market (e.g. the SGS Alternative) now suggest jobless rates approaching Depression-era thresholds, investors who continue to hunt for value at today’s price levels need to urgently examine their founding premises. For information purposes, Line U-3 states the official unemployment rate, i.e. 7.20%, while Line U-6 includes officially unemployed persons, plus “marginally attached” workers, plus part-time workers (for a rate of 13.5%).
If the alternative measurements include certain momentum-related data from Friday’s jobs report, the picture of the present and the future is bleaker. Nearly 25% of the “officially” unemployed (total of 11.11 million) have been looking for work for over six months. The unemployment rate amongst teenagers remains above 20%. Though the establishment and household surveys currently in use are not designed to identify the role undocumented workers play in the jobs matrix, the Labour Department concedes that only “some” undocumented immigrants are counted—which leaves a huge pool of approximately five million people willing to work, or employed illegally at low wages, on the statistical fringes of the job market.
Despite the widely assumed fact that an unemployment rate of 25% confirms the recession-to-depression transition, comparisons with the 1929-1933 phase of history are largely misplaced. Before anybody gets into panic-mode, this writer must point out that today’s social security net, which President-elect Obama says he will improve, dictates that unemployment levels in the 20s will not create the same broad conditions of desperation (and potential social unrest) witnessed during the Great Depression. But it is a matter of grave concern that the biggest challenge to the unemployment scenario is not being openly acknowledged and debated: viewed from the prism of relative (domestic vs. foreign) production costs, any rise in American jobs and wages must be conditioned by the continuing ability of developing-world economies to deliver cheap goods to American ports, and cheap services to American boardrooms.
Unless, of course, another Smoot-Hawley Tarrif Act (1930), or something similar, is enacted along with the $850 billion (or thereabouts) stimulus package. Already, spokespersons for the incoming administration are indicating that the final rescue plan will contain a “Buy America” provision for contractors engaged in the building of roads, railways, bridges, schools and green projects. Such a provision could signal the start of an entirely new phase of protectionism. By itself, such protectionism would be good for jobs, at least in the near-term. But will it be good for American business?
Arguably, Friday’s jobs report reinforces the short call on the major indices (DIA, QQQQ, SPY), in anticipation of a 20%-plus decline in equities in the first half of this year. However, this writer’s short positions are predicated more on what lies in store in the future, and less on the shape of the present.
Very briefly, the ability of American assets to sustain earnings and valuations, and to service outstanding debt obligations on a timely basis, has diminished substantially over 2008, mainly due to the commencement of the long-overdue de-leveraging process, deliberate and otherwise, in the global economy. We need to wait for this de-leveraging to achieve rationality via proven benchmarks before embarking on any bottom-fishing exercises.
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