Another Paint-By-The-Numbers Friday

It’s another paint-by-the-numbers Friday. The headline number was predictably rosy, but please don’t look underneath the hood. The jobs engine is still coughing and sputtering.

For instance, among the grand total of 280,000 new jobs reported for May, the entire goods producing sector—-construction, manufacturing, mining and energy—- accounted for just 6,000 or 2% of the gain. And that’s not just a monthly aberration. Employment in the most productive sector of the US economy has been shrinking for 15 years, and is still 2.4 million or 11% below its pre-recession level.

Goods Producing Jobs - Click to enlarge

Its worth noting that the average pay in the goods sector during May amounted to $47,000 at an annualized rate—-or in the vicinity of a living wage. Not so with the big gainers in today’s report, however.

According to the BLS, the nation gained 57,000 jobs in the leisure and hospitality sector—-that is, bartenders, waiters, bellhops and hot dog vendors at the ball park.  While the talking heads were cheerleading the headline number, of course, they naturally failed to note that from a production and income point of view, these are just one-third jobs.  Owing to low hourly rates and only about 26 hours per week on average, the annualized pay equivalent in the leisure and hospitality category is just$16,000.

Moreover, unlike the high productivity, high pay goods sector, the waiters and bartenders sector has been growing for 15 years and accounts for 43% of all the net new jobs gained since the pre-recession peak. That’s right. According to the BLS establishment survey there were just 3.7 million more jobs in the entire US economy during May than at the pre-recession peak, but fully 1.6 million were in the bread and circuses economy.

Bread and Circuses Jobs - Click to enlarge

Moreover, another big dollop of the gain was accounted for by retail clerks and shelf-stockers (31k) and temp employment agencies (20k).  Average annual pay equivalents in these categories are well less than $25,000 because by definition these positions represent part-time work and episodic employment “gigs”, not regular jobs in the traditional sense.

Indeed, the archetype here is the Wal-Mart “labor scheduling system” which atomizes jobs into 15-minute labor units. Yet the latter is only a slightly more sophisticated and high tech form of the manner in which much of the service sector slices and dices its labor supply. So there is really no point in counting payroll slots per the BLS establishment survey because it is a classic case of apples, oranges and cumquats.

Taken together, the part-time economy categories in this morning’s report accounted for 110k or nearly 40% of the gain—compared to the 2% share of family-supporting jobs in the goods-producing sector. The obvious implication is that what counts is the quality and mix of the jobs report, not the aggregate headline number.

This point is further reinforced by another big chunk of the May jobs gain which was accounted for by what I have termed the HES Complex (health, education and social welfare). Counting the 10k gain in local government education jobs, this segment accounted for another 84k or 30% of the May jobs increase.

The issue here is three-fold. First, average pay rates in this sector at $34,000 per annum are also well below the $50,000 standard which represents a full-time, full-pay median family income. So, again, the headline number is not nearly what it is cracked-up to be.

Secondly, and more importantly, the 32.3 million jobs in this sector are almost entirely “fiscally dependent”. To wit, these jobs are funded by $1.5 trillion of Medicare, Medicaid and other government health programs, more than $1 trillion of government education spending and billions more for day care, foster care, mental and social services and the like. On top of that add upwards of $200 billion of tax expenditures for employee health and related fringe benefits.

The point here is that these jobs consume tax dollars extracted from the productive sectors of the US economy. Accordingly, they essentially represent recycled income, not new production. Or in the alternative, they are funded on the margin with borrowed dollars via government fiscal deficits, and thereby represent the recycling of future income and output.

In any event, the rate of HES Complex job growth cannot be sustained because it will eventually run-up against the fiscal capacity limits of the state. As it happens, virtually all of the net jobs created in the US economy during the last 15-years are accounted for by the HES Complex. The real meaning of today’s report, therefore, is that fully 30% of the gain was attributable to a low-pay, low-productivity segment of the US economy that is most definitely living on borrowed time and borrowed money.

HES Complex Jobs - Click to enlarge

The above graph also goes a long way toward explaining the punk productivity trends that have afflicted the US economy in recent years. As a practical matter, the government’s measure of output in the HES Complex is arbitrary in the extreme. In the case of the education piece, in fact, output is simply deemed to be the sum of inputs such as wages and utilities.

Even in the giant health care sub-segment, the dominance of government programs (now compounded by Obamacare) means that the attributed output does not really represent production of health care at market prices, but just the arbitrary payment schedules of Medicare and Medicaid, which often represent only 10-25% of private payor rates.

So “productivity” in the HES Complex boils down pretty much to statistical noise. In no sector does the government measure productivity directly; its a residual obtained by dividing labor hours by “output” and calling the change in this ratio from one period to the next “productivity”.  When you divide a fuzzy “output” number for the health and education and social services sector by labor hours consumed, you get an even fuzzier figure than usual for productivity.

Finally, how in the world does the Fed’s manipulation of interest rates and financial markets spur spending growth and hiring in the HES Complex? The overwhelming share of spending is driven by tax and entitlement laws that automatically generate spending and jobs based on the number of citizens eligible and which apply.

Neither the entitlement laws or the recipients thereof care a wit whether the Fed raises the funds rate in September or 2016 and whether the rate ends up at 1% or 5%.

Stated differently, the overwhelming share of net jobs gains since 2000 have been in the HES Complex, and the latter is utterly indifferent to monetary policy and the fun and games its generates in the Wall Street casino.

Nonfarm Payrolls Less HES Complex Jobs - Click to enlarge

So why do we have Jobs Friday?  Mainly so that the money printers and their Wall Street friends can take credit for HES Complex job gains that they have almost nothing to do with.

Likewise, the part-time economy jobs come and go as the Fed’s serial bubbles inflate and bust, causing discretionary spending on retail, leisure and hospitality to rise and fall among the top 20% of households which actually have discretionary money to spend. Its hard to see how you can seriously say that these transient, $20,000 and under jobs represent the trend growth of real output and wealth.

Part Time Economy Jobs - Click to enlarge

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Submitted by J.C. Collins  –  philosophyofmetrics

Winter Rye2Perhaps it is time for digression. The world has gone off topic and wandered to the hidden edges of the rye field.  Many assume there is a sheer drop on the other side of that edge. The emptiness of the world fills itself with ignorance and the sludge of shallowness.  No catcher could ever prevent that world from going over that edge.  Let alone hold the weight when caught.

The phoniness of the edge itself is revealed by the endless expanse of rye. What mystery awaits when the edge cannot reveal itself?  The catcher could materialize from within the rye.  But to what end when the means has been denied.

The catcher could not be a man, as a man could not hold the weight of the world.  So Man can seed the rye fields for the world, and watch them grow.

The winter rye has deep roots which prevent soil compaction and create a cover against the forces of wind and water.  This cover of rye has extensive roots which improve soil tilth.

Tilth supports new growth.

It was early evening in Canada when I called Jim Rogers in Singapore.

“Okay, let’s get going,” said Jim, faced with the beginnings of a day.

Time has value and pleasantries don’t come cheap.  Feeling like a rookie I asked the typical questions about his early success with Quantum Funds and thoughts on the financial environment in China when he traveled there in 1984.

Rogers was first terrified about China, but western propaganda began to crumble when he saw that the country was alive with creativity and hardworking people.

These impressions of China served to re-enforce the core characteristics of independent thinking and not following the crowd.  Attributes which Rogers considers integral parts of his success with Quantum Funds.

There was a seed of commonalty on this matter as I also considered myself an original thinker and shared in Jim’s testament of how hard it is to go against the crowd and think independently.  This independence allowed Rogers the freedom to invest in China.  Investments which he has never sold.

We chatted about things such as the Vietnam War and the American invasion of Iraq, along with the effects of propaganda on the western mind.  It was clear that Jim Rogers was a man of purposeful intent and had an innate ability to see through economic and geopolitical propaganda.

Like China before, Rogers realized that despite the propaganda, there are growing opportunities in countries such as Iran, Russia, and North Korea. All three being the target of western propaganda and campaigns to redirect capital investments.

The agricultural cycle has been in lows for decades and Rogers expects commodities, and agricultural specifically, to turn around and see substantial growth in the coming years and decades. Growth which has the potential of increasing domestic GDP of countries strong in agricultural potential, such as the United States, Russia, and even Ukraine.

It has been widely communicated throughout western media that the sovereign debt of the United States could never be paid.  Rogers shared in this sentiment and added that the US deficit would also not be reduced.  He had been very clear that his dollar position was strong and he didn’t see that changing.  The reason for this has more to do with the lack of an alternative as opposed to strong domestic economic fundamentals.

This got me to thinking, with so much talk about countries never being able to pay back their sovereign debts, the question is never asked whether they need too. At least in whole.  Such a reframing of the debate is typical of further understanding and education on such matters.

The merits of a debt based fiat system are few.  Regardless, the point is not to pay the debt off, but to manage the debt.  Governments will never be completely debt free and deficits rise and fall.  Governments can, in effect, continue to borrow forever.  But that doesn’t mean that the debt burden will increase forever.

After World War Two the United States government decreased its debt-to-GDP ratio from 121% in 1946, to 32% in 1974. This was after record deficit spending during the war years.  The following chart captures the rise and fall of deficit spending and debt-to-GDP ratio of the United States since 1790.


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Payroll Stats Become Even More Implausible

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Since Q1 GDP was revised lower by almost 1% that meant estimates of productivity were going to be even more out of alignment than they were at the first release. Of course, in a less massaged environment productivity might have preserved some sense if there was less rigidity from the BLS on the employment side. In other words, when “output” estimates were reduced (and they were, by more than GDP) it would make sense that everything would be revised downward in a more cohesive process. Instead, output was reduced significantly, by 1.4%, while total hours worked was marked down by all of 0.1%.

As a result, productivity is revised from a nonsensical -1.9% to an even more skeptical -3.1%.

ABOOK June 2015 Labor Productivity Q1 PrelABOOK June 2015 Labor Productivity Q1 Revised

If this was just a one-quarter problem, then it would be easy to dismiss as random variation or expected variance in all these statistics trying to tie together across real economy lags and such. But that is not the case, as productivity, and by extension the estimates for how “expensive” marginal labor is and thus the primary reason businesses hire and fire in the first place, has been seriously “off” for some time. With these latest estimates and revisions, productivity is now -0.7% over the last 5 quarters dating back to last year’s polar vortex. That just doesn’t make any sense in a meaningful context of business operations in the real economy – especially when the BLS is saying that this has been the best run of hiring in decades.

The productivity figures alone show us how the BLS is likely overstating labor gains. Simply substitute a more meaningful level of productivity, such as the average gain during the less robust hiring period of 2003-07, and, by the rigid method of calculation here, total hours gained almost disappear entirely.

ABOOK June 2015 Labor Productivity Last 5ABOOK June 2015 Labor Productivity Last 5 More Sense

The last time the Establishment Survey was as robust as the past year or so was 1999; then, the average productivity was 3.7%! That number actually makes sense intuitively, since businesses would have good reason to go on a hiring spree. Porting that to the current period, as in the mathematical construction of productivity here, would mean, holding output constant, that total hours in the past five quarters would have been not +2.7% but -1.7%. These numbers literally do not add up. Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

America Is A Ponzi Scheme: A Commencement Speech For The Scammed (Tom)
IMF Has Betrayed Its Mission In Greece, Captive To Eurozone Creditors (AEP)
Why The Battle Between Athens And Brussels Matters To All Of You (Andreou)
Greece’s Creditors Need A Dose Of Reality (Joe Stiglitz)
Greece: Time For Default And Debt Restructuring (Forbes
Greek PM Rejects ‘Absurd’ Proposal From Creditors (Reuters)
EU To Lend Greece €35 Billion If It Agrees To Reforms – Juncker (RT)
Leaked: Greece’s New Debt Restructuring Plan (FT)
The Blindness Of The European Powers (Jacques Sapir)
The Economic Consequences Of Austerity (Amartya Sen)
The Ready Cyclist And Our Great Collision (Nikos Konstandaras)
Could A Digi-Drachma Avert A Grexit? (Reuters)
New Zealand Heading Toward ‘Social And Housing Apartheid’ (NZ Herald)
UK Housing: The £24 Billion Property Puzzle (FT)
Japan’s Peter Pan Problem (Pesek)
Emerging Markets Are Caught Up In The Bond Rout (CNBC)
‘Russia Would Attack NATO Only In A Mad Person’s Dream’ – Putin (RT)
60% of China’s Underground Water ‘Not Fit For Human Contact’ (RT)

Much more here: Debt Rattle June 6 2015 –