Job Formation Falters, Real Wages Slip, Yield Curve Flattens
Among the many factors that could cause job formation to slow dramatically at the same time the unemployment rate is dropping is workers being dropped in official tallies of who is in the "labor force": workers who stop actively seeking employment are not considered unemployed anymore; therefore, as their numbers grow, the official unemployment rate drops. The Bush Administration mounted a united front in the face of the dramatic drop in new jobs being offered. Labor Secretary Chao said on Friday that the report demonstrates that "...the economy is continuing its 2-year solid streak of job creation," and President Bush on Saturday declared, "America's economy is on the right track."Dark Wraith CyberGloss
Data to calculate the unemployment rate is collected from households, while data for new job formation is collected from businesses.
In other labor news, the Labor Department reported that average hourly wages grew in May by a mere 0.2 percent, for an annualized growth rate of slightly more than 2.4 percent, well below even the official inflation rate that, as of April, stood at 3.5 percent. Little noticed in the United States, an article published May 10, 2005 on the Website of the Financial Times gives more evidence of a deep, long-term trend of eroding real wages in the United States: according to the authors, a study done by the Financial Times indicates that real wages in the United States are falling at their fastest rate in 14 years and that, as of the end of March, the year 2005 has been following the same, seemingly well-established pattern. The article states that, "Inflation rose 3.1 per cent in the year to March but salaries climbed just 2.4 per cent..."
Finally, as noted recently here on The Dark Wraith Forums in the article, "Of Crystal Balls and Yield Curves," some economists are becoming increasingly concerned by the recent behavior of the so-called "yield curve," which shows interest rates of various maturities of government debt instruments:
normally, the yield curve has a relatively smooth, upward slope, since long-term interest rates should be somewhat higher than short-term interest rates, holding all other factors constant. An "inverted yield curve" is one in which short-term interest rates are actually above long-term rates. Inverted yield curves have preceded five recessions in recent U.S. history. What has been troubling over the past several months is that the yield curve, although still upward sloping as it should be, has been flattening out, as if it is moving toward the dreaded inversion. The graphic at left shows the yield curve of late April in blue and the yield curve as of yesterday in red. Readers may note that, not only is the yield curve flattening out quite visibly, but it is also pivoting around the intermediate-term instrument values. This means that short-term rates are rising, and long-term rates are falling, with the intermediate-term rates acting as the fulcrum of a sort of financial lever. If the short and long yields meet some time in the next several months, that would be the threshold of the inversion, and any further rise in short-term rates attended by a fall in long-term rates would be a classical inverted position for the yield curve. Although inverted yield curves have appeared in the past without a recession following, they are, nevertheless, considered a leading warning sign, one that is ignored at the risk of believing, as President Bush does, that the U.S. economy remains "on track," despite the mounting evidence to the contrary.
Published 6/07/2005 01:08:00 PM
<< 15 Comments Total
GM Plans Job Cuts
Dear Dark Wraith,
Ahhhhhh, my favorite - the inverted yeild curve! Greenspan said this is not always the harbinger of economic doom, in the form of recession - only, what was it, 6 times recently.
My question: does anyone know how many times recently have we had the inverted yeild curve without a recession??
Now, if we are in a recession, and interest rates have gone up and up, and say I am holding T-bills, they will still have to pay me the $1000.00 on the day they mature, right? Is there any reason or circumstances besides the end of the world as we know it, that the T-bills would not pay on time what was promised?
Every way I look at it, these people who are creating the IYC by preferring long term instruments over the short term, well, they look kinda crazy.
Ah! The curve! Class is in session again.
You mention earlier in the article about the unemployment totals not reflecting those who areno longer considered a part of the workforce, those who have stopped looking. i've always had a problem with this, becasue shouldn't everyone bve looking? I'd be curious to know how they make this determination in building the monthly unemployment figures.
The good Wraith's second paragraph in one cartoon:
Wages
To go with polishifter's comment above:
http://tinyurl.com/b7qyn
Good evening, SB Gypsy.
A couple of points of reference are in order. First, derived from the faculty of economics Websites at Northwestern University,I list below the inverted yield curves and the associated five recessions that followed:
Inverted Yield Curve: April 2000-December 2000. Recession began March 2001.
Inverted Yield Curve: January 1989-September 1989. Recession began July 1990.
Inverted Yield Curve: January 1982-April 1982. Recession continued until November 1982.
Inverted Yield Curve: September 1980-October 1981. Recession began July 1981.
Inverted Yield Curve: September 1978-April 1980. Recession January 1980.
Second, in a study published in 1996, economists Arturo Estrella and Frederic S. Mishkin of the Federal Reserve Bank of New York found that every recession since World War II, up to the point of that publication, had been preceded by an inverted yield curve. Now, in the April 2005 issue of Credit Union Magazine, in the article entitled "The Yield Curve Conundrum," author Bill Hampel states the following:
Since 1950, the one-year/10-year Treasury yield curve has inverted (one-year Treasuries yielding more than 10-year Treasuries) nine times. Recessions occurred within five quarters of eight of those occurrences.
There was only one false positive, and a one-quarter economic slowdown followed that inverted yield curve-not quite a recession, but close. Also, an inverted yield curve preceded every recession. The inverted yield curve has been right 8.5 of the past nine times.
In contrast, you can probably find recent analyses by the Fed and by economists who may or may not have some vested interest in keeping markets calm that claim the inverted yield curves not only are unreliable predictors of recessions, but are downright terrible. For the time being, I am dismissing those claims because the economists who are "discovering" this lack of reliability of inverted yield curves are doing some pretty impressive statistical analysis to come to their conclusions, and it looks to me like they're using those rather powerful tools in an effort to obscure something that's pretty darned self-evident as long as it's not tortured by some fancy computer. That is not to say I can't be convinced that what I'm seeing is not the result of my eyes lying to me; but for now, I'm going to rely on the track record of the inverted yield curve as a predictor of a coming recession, recognizing as I do that it has failed, but also recognizing that it's probably the best predictor we have.
On to another issue you brought up. Yes, the government will pay off its debts. Rest assured that Hell will freeze over before the government defaults on any of its obligations, our irresponsible President's sneering intimations to the contrary notwithstanding. How the government does this presents some interesting issues, of course: our Republican panderers have cut taxes so many times and to such an extent that the revenue base for federal government cash inflows cannot possibly cope with the expenditures that same federal government makes year-over-year. And the claims that some budget-slashing festival in the next few years will solve the problem is just plain farce: the committed expenditures from here to eternity cannot be lessened; and all that can be done—all the radical Right really wants to be done, if the truth were to be told—is a wholesale eviceration of domestic, discretionary spending, which amounts to a drop in the bucket compared to the size of the budget deficits.
In a worst-case scenario, the Federal Reserve might be forced to step in to inflate the economy: essentially, the central bank would print enough money to get the government out of its debt hole. This is what the Fed did after World War II: it essentially printed enough money to pay off the war bonds, thereby creating an inflation that made the face values of debt instruments—particularly long-term debt instruments—erode over time like snow melting in the sustained, pounding, inflationary heat.
As I noted in a previous thread, this means that all of those flag-waving, patriotic citizens who purchased war bonds to "beat back the Hun" did was little more than pay a voluntary tax that they could pretend was going to be rebated to them once the war was sufficiently behind the country. In the end, by the time Ma and Pa America were able to cash in those loans they'd made to Uncle Sam, the face value of their war bonds had eroded to a pathetic and paltry pittance in real terms.
Sort of depressing, isn't it?
The Dark Wraith does love economics and finance.
Good evening, Left Behind Child.
This is a bone of contention for some economists because of the way the government drops people from the labor force count once they've stopped "actively seeking" "gainful employment"; and I've put those terms in quotation marks to emphasize that they are technical terms the government applies to the unemployed to determine whether or not they should be counted as in the labor force but not currently working.
I find it ironic in a related regard that you'll see some financial news services, like CNN Money, parroting the right-wing economists' line that the unemployment rate shouldn't be taken all that seriously, anyway, because the data is so unreliable since it uses information collected from households rather than from businesses.
Rest assured, though, that the application of that term "actively seeking" has real teeth. If you are looking for work, but you've been out of a job for so long that you're not pounding the pavement every last day, you're going to eventually slip into the ranks of those who are not even in the labor force and therefore don't get counted among the unemployed.
In other words, Left Behind Child, at some point, you not only don't matter, anymore, you don't even qualify as a statistic.
The Dark Wraith finds that almost a metaphor of post-modernity.
Thanks Mr. Goat for that Toles 'toon!!
(God, Toles is good!)
- oddjob :-)
in a pathetic attempt at humor i'll point out that mr prez doesn't say where the track the economy is on is going.
dark wraith--rexroth's daughter is touched by your compliment. she is a bit of a sideways insider in the econ game, having for a while been an advisor to econ grad students, mostly because she is so adept at interpreting university policy, which is murkier and more turgid than econ itself.
Good evening, Dread Pirate Roberts.
I know very well the torment of advising business and economics students. The maze is confounding at some universities, where an academic tradition of liberal arts to some extent conflicts with the goal of business programs, which seek something far more like trade school training. The conflict creates a Byzantine maze of courses in both high academia and skill-craft. I had to literally bite my lip more than once when advising students at one prestigious, private college at which I taught: I swear, there were so many distinctions and requirements and courses that met some, but not other specifications that I was constantly asking other faculty members for help; but they would almost invariably just grumble about the whole mess and turn their backs on me.
That, by the way, is why I am averse to colleges and universities that lump economics in with their business programs. That just ticks me off. Unfortunately, the alternative is often lumping economics in with the social and behavioral sciences, but it doesn't belong there, either. Although it's not the ideal path, the one with which I am the most comfortable is allowing economics to sit within its own division, independent of both business and social and behavioral sciences. This puts the students squarely into the requirements of general baccalaureate education—including lots of English, humanities, and science coursework—and it thereby spares the students the narrowed view they would get from being under the course requirements of a business program. It also keeps the pressure on these young folks to acquire a higher level of math training than they would get were they to be in the social and behavioral sciences, where there is generally an understanding that the students must be spared the rigors of heavy math. That's a disaster for econ undergrads who go on to graduate training in economics, where the math starts out knock-down serious and gets worse from there.
Geez, you got me on the subject of the machinations of academia.
The Dark Wraith will stop prattling, now.
After looking at the time frame for the inverted yield curves, a few questions come to mind. First, what is the difference between the "Stagflation" environment of the late 1970's, and a true recession (which began in January 1980?) How would the casual observer tell them apart? And secondly, what were the economic events that contributed to the inversion of the yield curves in the 1978-1982 timeframe? I guess what I'm really asking is, does a cycle of stagflation invariably lead directly to a recession of this nature, or did the clamp-down on the money supply by Paul Volcker (however necessary that it was) cause the recession?
Good evening, LindiBee.
The key in a stagflation is the combination of inflation and slow economic growth. Under normal economic circumstances, this shouldn't happen. The inflation usually hits late in the expansion phase of the economic cycle, when the accumulated excess of the money supply over the real growth rate of the economy sets off a continuing rise in the aggregate price level, which is the technical desciption of what is more commonly referred to as "inflation." This is usually the result of the economic expansion having been set in motion by the Fed pumping money into the economy when it was in the previous recessionary phase.
Throughout the 1960s, and well into the 1970s, the central bank had been pushing excess money into the economy because it could get a short-term boost in activity from doing this. However, every successive time it pulled this stunt, it was getting less and less bang for the buck (and pardon the pun, there), so it was pushing harder on the growth rate of the money supply as time went on. This was especially exacerbated by the OPEC oil embargo, which the Fed "monetized": in other words, the Fed printed money by the boatloads to ensure sufficient liquidity throughout the U.S. economy. In practical terms, to keep everyone from turning ugly because of the long lines at the gas stations, the Federal Reserve printed and handed out money throughout the economy.
The effect of this was to ensure that, instead of a price rise in one sector (energy), which is not inflation, the Fed created price rises in all sectors, and that is inflation.
The whole party came to an end when President Carter fell on his sword by appointing the vicious monetarist, Paul Volker, as Chairman of the Federal Reserve Board. Volker crushed the money supply to throttle inflation, and this necessarily this drove interest rates up (remember that interest rates are the price of money); but interest rates were already sky-high because of the huge expected inflation premiums in them, so interest rates went into orbit on the combination of large expected inflation premiums being impounded in them and the diminishing supply of greenbacks circulating in the economy.
Well, that good ol' U.S. economy went right smack into a major recession; and Carter was, of course, kicked out of office. Eventually, inflation cooled off; but more importantly, expectations of inflation cooled off, and interest rates began to ease downward, not because the Fed was opening up the money supply, but rather because the expected inflation premium in interest rates was finally vanishing. And it was those interest rates that had been abnormally high, coupled with the fact that the former central bank policy of easy money had lost its ability to stimulate the economy as it had in the '60s and early '70s, which had caused the stagnation coupled with inflation that finally settled into the economy during President Carter's Administration.
Oh, yes, I almost forgot to mention that Ronald Reagan basked in the limelight of the healthier economy that had been created by the self-destructive decision of Jimmy Carter to appoint a monetarist.
There's a lesson in there somewhere.
The Dark Wraith will allow the readers to determine what, precisely, that lesson is.
Good evening, once again, LindiBee.
I forgot to mention that Jimmy Carter also slashed government spending in 1979 to close what he saw as an inappropriate policy by the government of deficit spending.
In an economy that had, for years before (and for years after that in the Reagan and Bush I Administrations), lived off the federal spending hogtrough of big government and big government deficit spending, that was a major killer of what little economic stimulus remained.
Yep. President James Earl Carter: a case study in what not to do as President of the United States.
The Dark Wraith encourages everyone to avoid at all possible costs the very idea of doing what is best.
Oddjob, you know what's funny about the Toles toon? I almost said Hey Oddjob, you missed one. :)
Touché!
- oddjob
(ps: for those too young to remember, inflation rates back then were between 10% & 15%. That was high enough for a bank certificate of deposit, normally one of the weakest of financial investments in terms of return on investment, to compete with common stock investments. It was a bizarre time. Mortgage rates hovered between 18% and 22% at their highest. Can you imagine handling such a 30-year fixed mortgage? It was NOT a fun time!)