A recession like no other

The American public doesn’t think about unemployment properly.  Our attention is focused almost entirely upon a heavily doctored statistic, the U-3 unemployment rate from the Bureau of Labor Statistics, which measures only participation within a carefully-defined subset of the working population.  People who exit the workforce entirely, by virtue of remaining unemployed for too long, disappear from this calculation entirely. 

Thus, the U-3 unemployment rate is currently 8.3 percent, but if you regard “unemployment” as the percentage of working-age Americans who don’t have a job, the true figure is closer to 36 percent.  When Obama supporters cook up safety-blanket statistics about how many “jobs have been created” for their Facebook pages, they simply ignore population growth – if 5 million people enter the workforce but only “2 million jobs are created,” the economy is not in a happy place. 

They also pull little tricks like counting government jobs as “job creation,” and ignoring the end of temporary jobs created through big-bucks stimulus spending.  They love adding up the “seasonally adjusted” figures for a convenient range of months – basically ignoring the years 2009 and 2010 – to trumpet Obama’s wondrous “job creation” achievements, while Americans mired in a stagnant economy with high employment scratch their heads and wonder why Democrat Party press releases paint such a different picture than what they see outside their windows.

John Crudele at the New York Post recently explained how the “seasonal adjustment” game is played:

Take, just as a single example, Labor’s report in early February. It showed that 243,000 new jobs were created in January.

The only problem was that the number wasn’t true. The pure, undoctored, not seasonally adjusted figure showed there was really a loss of 2.689 million jobs.

There is always a loss of jobs after the Christmas season. And any professional in the financial industry who doesn’t know that needs to get into another line of work.

As I’ve reported before, the 2.689 million job loss turned into a gain of 243,000 only because Labor’s seasonal adjustment programs expected the job losses to be bigger. The warm winter weather probably kept some people from being put out of work, and this threw off Washington’s calculations.

What’s really going on in the labor force?  Jim Pethokoukis of the American Enterprise Institute points to a chart prepared by the Federal Reserve Bank of New York, which he calls “one of the most astonishing charts I’ve ever seen.”  The chart compares three statistics: the unemployment rate, labor force participation, and the employment-to-population ratio.  In every previous business cycle, these figures diverged during the recession – unemployment up, labor force down – but came together again when the recession ended.

Not this time.  This time, unemployment versus the labor force blew apart like a monster opening its jaws wide:

As the New York Fed observes:

In the most recent cycle, the employment-to-population ratio traces out an L shape, but the unemployment rate falls because the participation rate declines substantially (a much more gradual decline was expected by many given the aging of the baby boomers); in other words, a larger share of the population is out of the labor force rather than participating and being unemployed.

They explain why this comparison is important:

Often, discussion of employment focuses on the number of jobs added each month, as measured by the payroll employment change; for example, see this recent post in the Atlanta Fed’s macroblog. A different but very much related measure is the number of employees relative to the working-age population, known as the employment-to-population ratio. Even though it receives less attention, this measure is more closely related to overall economic growth relative to trend than is the payroll employment change.

For example, consistent with recent GDP growth being around trend, the employment-to-population ratio has risen modestly over the past six months. In contrast, in the early 1984 episode, the employment-to-population ratio increased much more robustly as the unemployment rate declined, thus providing considerable impetus to growth.

(Emphasis mine.)  And what we’re experiencing right now will likely be remembered as the “salad days” before another economic downturn hits.  The modest improvements in our employment situation charted over the past few months more closely match the profile of a “short expansion” than sustained economic growth.  The Congressional Budget Office expects anemic 2 percent GDP growth for the rest of 2012… followed by a sickening drop to 1.1 percent growth next year.  They anticipate our economy performing beneath its potential until 2018 at the earliest. 

Other analysts think the CBO is being too optimistic.  Goldman-Sachs, for example, recently cut its first-quarter forecast for GDP growth to well under 2 percent.  Much depends upon events in Europe, which could deliver shocks our weakened domestic economy – already stretched far beyond what previous generations would have regarded as emergency wartime federal debt – cannot endure.

This recession really is different than all the others.