Thursday, March 20, 2014

My View

Random ruminations from your resident curmudgeon...

Turn on CNBC or listen to the news and you find the markets eagerly awaiting economic numbers- inflation statistics, unemployment numbers, and many more. Good numbers can move the stock market higher while bad numbers cast a pall over the markets and drive stock prices downward.

New Federal Reserve Chairman (woman?) Janet Yellen proclaimed this week that the jobs numbers looked good and that the economy was showing signs of underlying consistent and significant growth.

Or really?

There are a myriad of statistics and economic data out there, but I want to focus on two areas: jobs and inflation, because they have a major impact on our economy nationally and our financial well being as individuals and families.

I have often discussed that those who have lost their unemployment benefits are no longer counted as unemployed for the purposes of tallying the unemployment rate. That has helped to drive down the stated unemployment rate from 10% to 6.5% There are some other "adjustments" that have been made in the way the Bureau of Labor Statistics (BLS) compiles this number that has made it look favorable.

Irrespective of the unemployment numbers, there is another key variable that has not been discussed much in looking at jobs, and that is the average workweek. While a worker may be employed, if their hours are cut, their take home pay is smaller.

And that is what has been happening with the great majority of jobs in this country.

According to the BLS, a better measure of the strength of the labor market and the economy is the total hours worked. That computation is simply the multiple of the average hours worked by the number of workers.

For instance, an employer has 50 forty hour per week workers. The total hours worked in that company is 2,000. Now, if that employer replaces those 50 workers with 70 twenty hour per week workers,  he is contracting, not expanding the business. Total hours worked is 1,400. Yes, there are more bodies, but less hours worked by those employed.

Less hours worked is equivalent to losing jobs in the economy.

And less hours worked is less disposable income to spend by those that have a job..

From September 2013 to February 2014, the average workweek has fallen from 34.5 hours to 34.2 hours, according to the BLS.

Doesn't sound like much, does it?

Here is the real impact of that small shrinkage in the workweek: the economy added 900,000 jobs from September through the end of February. The shortened workweek over that same period was the equivalent of losing 1,000,000 jobs.

Net, the economy lost approximately 100,000 jobs over the period because although more bodies were added to the work force, fewer hours were worked.

Now, let's take a look at inflation.

The Consumer Price Index (CPI) numbers are very important data points that are closely watched for signs of inflation creeping back into the economy. The CPI measures changes in prices for goods at the retail level- what you and I pay for items in the store.

We are continually told that inflation is "benign" or "tame" and that we don't have to worry about rising prices.

Uh...about that.

The Wall Street Journal reported today that beef prices rose 5% in February, the single biggest surge in the price of beef since 2003.

It is not only beef that is skyrocketing in price.

U.S. fresh vegetable prices jumped 4.7% last year and are expected increase another 3% this year. Fruit prices rose 2% last year and are expected to rise 3.5% this year. Cocoa (and the end product of chocolate) are already up 12% year to date; coffee is up 70% on global markets; and pork prices are up 42%.

In fact, food prices have gained an average of 2.8% per year over the last 10 years, according to the BLS, which tracks price data.

Inflation in food prices does not occur just with a nominal price increase. Bought a bag of potato chips recently? The bag has as much air as product. Food manufacturers are cutting the size of the portion while keeping the price the same, which is a price increase, even though the price tag hasn't changed.

So why bring all this up?

Two reasons.

First, the numbers that we get on the news about these key data points are suspect. Prudent people will look below the surface to examine the real numbers and the real impact on the economy. When Janet Yellen or any government talking head tells you the economy is showing signs of strength, look closely.

The words most often will not match the facts.

Secondly, know that as inflation creeps higher (and it is) and incomes continue to get squeezed regardless of the stated jobs numbers, this economy will continue to struggle to grow and provide good jobs and incomes for its citizens.

No amount of happy words will change these facts.

And that, my friends, is my view.

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