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.
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.