Right Track/Wrong Track

Yesterday when I watched ABC’s This Week and heard Dr. Lawrence Summers, former Director of the Obama Administration’s National Economic Council, characterize the economy as “on the right track&148; I nearly flipped my lid. This was, apparently, a reaction by him to the recent BLS report that stating that the economy had created 243,000 jobs in January and that the unemployment rate had declined to 8.3%. That put me, essentially, in agreement with Paul Krugman, something that occurs two or three times a year:

In a better world — specifically, a world with a better policy elite — a good jobs report would be cause for unalloyed celebration. In the world we actually inhabit, however, every silver lining comes with a cloud. Friday’s report was, in fact, much better than expected, and has made many people, myself included, more optimistic. But there’s a real danger that this optimism will be self-defeating, because it will encourage and empower the purge-and-liquidate crowd.

That’s just about where my agreement ended, however.

If you believe the BLS report, something which IMO requires a nearly superhuman suspension of disbelief, the number of jobs created exceeded the number of jobs required just to keep up with the natural increase by just 120,000. At that rate, sustained continually every month, it would take roughly eight years to put all of the people who are still looking for jobs back to work. Further, virtually all of the decline in the unemployment rate is due to people giving up looking for work. If the number of people looking were the same as it was just two years ago, the unemployment rate would be over 9%.

In response to Dr. Krugman’s remarks on the sustainability of the growth, two points. First, the BLS always reports high job growth in January. It’s an artifact of their reporting system. Second, if housing prices actually started to rise, something I don’t anticipate for a number of years, a flood of houses would come back onto the market, increasing the “overhang”. We wouldn’t see a spate of new construction.

We are not on the right track. Claiming we are is as feckless and poorly advised as saying you don’t care about the poorest people.


Bruce Krasting saw the problem, too:

Larry Summers is a possible candidate as the next Treasury Secretary. He has all the credentials. He knows where the bathroom is; he’s had the job before. But he blew it on the issue of what happened to the LFPR this month. He gave the wrong answer, with 10mm people watching.

Let me add one observation: the decline in the labor force participation rate is extremely bad news on many grounds. One of the grounds rarely mentioned is the impact on revenue. With income falling (as it has) and the LFPR falling (as it has) that means that the federal government won’t see revenues return to their 2007 levels for a long, long time. That means that, absent a sudden unlikely spasm of frugality, we’ll borrow more and pay more interest than we otherwise would have done. In particular, the Social Security Trust Fund will go into the red years ahead of schedule.

Update 2

Barry Ritholtz responds to the naysayers on the most recent BLS report:

Ignore the economic foolishness of the biased political hacks and perma-bears. If you want an excuse to be cautious on the markets, then look at the mixed earnings near a cyclical peak, the overbought condition of indices, and the headaches in Europe. There are always plenty of reasons to be concerned and worried — but the January NonFarm payrolls isn’t one of them.

To restate my position: of course 243,000 more jobs is better than 120,000 new jobs and an unemployment rate of 8.3% is better than one of 8.6%. Consequently, the January report is a good one. I’m uncomfortable with the BLS’s various fudge factors; I wish there were more transparency than there is and even the BLS itself admits to problems with the birth-death model. I’m dismayed with the decline in the LFPR.

8 comments… add one
  • Andy


    Lawrence Summers has a doctorate and is a really important person and that gives him the ability to make concrete predictions based on single data points.

  • Icepick

    Larry Summers is a possible candidate as the next Treasury Secretary. He has all the credentials.

    He cheats on his taxes?

  • Icepick

    Apparently there is a plunge in petroleum and gasoline usage happening now. The overall pteroleum drop could be “blamed” on a freakishly mild winter, but gasoline usage is down? That doesn’t speak to a growing economy. And I know of several businesses that are struggling (sinking, more truthfully) despite the alleged rcovery that has been going on for over two and a half years, and even the business that I know of that are doing better are letting people go because of lack of demand. I’m still seeing stores closing, empty retail space that can’t be filled, etc, etc, etc.

    Also, tax revenue just doesn’t seem to be going up at a pace that indicates rapid job expansion. Unfortunately I just can’t get enough free time to pull those numbers together, but the Treasury Department releases that data daily. (They release the numbers, but not in convenient form.)

    What I am seeing is an economy that is bouncing along the bottom. I’m not sure that it won’t drop lower though if any kind of big shock hits it.

  • Drew

    Ice pick observation at 12:45

    I wish I could disagree. That’s my view as well. When I look at our portfolio companies and ask myself where is the sales growth coming from in all but one it’s our new product development/intro efforts, or better value propsition. It’s not the macroenvironment. We are not riding the wave, and the wave is meager at best.

  • Maxwell James

    People fixate way too much on the monthly jobs report. Its the trend that matters, and as Scott Sumner points out here, the trend is seriously weird.

  • steve

    1) Our LFPR has been on a downwards trend for a while. I suspect this is due to several factors. The early boomers are starting to retire. Kids take longer to finish school, and more are going on to graduate school. I think a number of married women are dropping out fro cultural and economic reasons. Still, the crappy economy is the primary cause. I would like to see a better quantification.

    2) In our area, restaurants are busier and we see more Help Wanted signs out.


  • Ben Wolf

    If I may step into the realm of polemics, Summers is a self-absorbed, negligent and greedy little man, one who can claim credit for having some direct responsibility for the financial crash. He will say anything to justify his egregious mistakes, while the elite to which he belongs ensures he continues to fail upward in life. He’ll be a perfect fit with this administration.

  • Icepick

    He’ll be a perfect fit with this administration.

    He’d probably fit in with any other Administration likely to be in power in 2013 as well.

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