An objective review of the economic data indicate that the U.S. economy is approaching a second downturn of the recession that began in 2008. Real Gross Domestic Product (GDP), real median household income, payroll employment, real retail sales, housing starts, and consumer confidence dropped sharply during 2008 and 2009 and have not recovered their previous peaks. Most are bottom-bouncing at the recession low.
But the government isn’t giving us an honest economic picture. Key economic indicators that are widely reported in the media are easily and commonly manipulated to get the numbers moving the desired direction. If you strip away the bias built into the publicly released numbers, the statistics reveal an economy that is going nowhere but down.
Here are other ways the numbers are manipulated:
Gross Domestic Product. GDP represents the total dollar value of all goods and services produced — essentially the size of the economy. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year. The GDP is a major driver of the the stock market. But the official recovery in real GDP has been achieved by deflating nominal GDP with a measure that understates inflation.
Inflation. Inflation is spun by changing the way it is measured to a substitution methodology so that the Consumer Price Index no longer measures a constant standard of living. If a price of an item in the index rises, that item is discarded and a lower priced alternative is substituted. This method of measuring holds down inflation by measuring a declining standard of living. For example, if the price of New York strip steak rises, the new methodology substitutes round steak in its place. Lower inflation is also achieved by the assumption that many price increases are really quality improvements and, therefore, are not entered into the measurement of inflation.
Using previous official methodology, the aim of which was an accurate rather than understated measure of inflation, John Williams, a statistician at shadowstats.com says that the current rate of inflation is several times the reported rate. This result is consistent with the experience of grocery shoppers. While consumer incomes are static or falling, prices are rising.
Unemployment. The unemployment rate is spun by using a measure that does not count discouraged workers or those who are working but underemployed. Discouraged workers are people who have given up searching for a job, because there are no jobs to be found. The unemployment rate reported by the media does not count discouraged workers as unemployed.
If you look at the real economic statistics without these modifications, you can see why the U.S. economy is in much deeper trouble than political leaders would lead us to believe. Here are the facts about unemployment without the spin:
Payroll employment peaked in 2007. As of June 2013, four years after the official declaration of economic recovery, payroll employment is 1,698,000 below the 2007 peak. Meanwhile, the work force has grown by 6 million.
In June 2013 the official unemployment rate that counts short-term discouraged workers (less than one year) was 14.3%, almost double the 7.6% reported rate. The reported rate can decline for no other reason than unemployed workers move from “unemployed” to “given up looking for work” category. In June short-term discouraged workers increased by 247,000, 52,000 more than the reported job gain.
Statistician John Williams at shadowstats.com estimates that adding all discouraged workers — short-term and long-term (more than one year) to the reported rate brings the June 2013 U.S. unemployment rate to 23.4%. In other words, the actual unemployment rate is more than three times the reported rate. Williams’ estimate is consistent with the drop in the labor force participation rate. The participation rate indicates the number of workers actively in the labor market. The drop in the rate points to discouraged workers who cannot find jobs.
A rising share of employment consists of temporary jobs and part-time workers. Seventeen million people — 12.5% percent of the U.S. workforce — are temps, contract workers, freelancers, and consultants who are not considered permanent employees. They do not qualify for medical benefits, pensions, or raises, are paid less than regular employees, and can be easily discharged without severance packages.
If these 17 million workers, who have tenuous connections to employment and whose paychecks are too uncertain for them to be big spenders, are added to the number of unemployed Americans (23.4%), It is obvious that much of the work force lacks the discretionary income needed to drive the economy.
Short-term contract work has found its way into skilled professionals such as nurses, doctors, lawyers, engineering/design, and information technology specialists in addition to manufacturing, warehousing, and office clerical employment. Colleges and universities have reallocated their budgets from teaching and research to administration. And to cover their teaching responsibilities, they hire “adjunct professors” to teach the courses for low pay without benefits or a career path.
Part-time work is another category that needs to be taken into account in order to understand the job picture. The Bureau of Labor Statistics breaks part-time work into those who work part-time for noneconomic reasons and those who work part-time for economic reasons. Part-time workers for noneconomic reasons include people with child care problems or other family obligations and those who are attending school or training programs. Those working part-time for economic reasons are workers whose hours have been cut back and workers who cannot find full-time jobs. Part-time jobs generally do not provide much discretionary income.
According to the BLS, as of June 2013 there are 19 million Americans working part-time for noneconomic reasons and 8.2 million working part time for economic reasons. That means that there are 27 million Americans — 20% of total non-farm payroll employment — in part-time employment.
There might be overlap between temporary and part-time workers. Regardless, adding 27 million part-time workers to 17 million temporary workers to a 23.4% unemployment rate means that a very large percentage of Americans lack discretionary income.
These deteriorations in consumer purchasing power and economic security are called “innovations” by their apologists. In the short-run they benefit Wall Street, shareholders, and executives who are awarded “performance bonuses” for paring employee costs and raising profits. In the long-run they destroy the domestic consumer market and the value of a college degree.
Who will the corporations sell to when consumers are unemployed or have no disposable income? Who will take on student loan debt in order to gain a degree that cannot lead to remunerative employment? The end of U.S. science is in sight. Who will commit to an advanced degree when universities pay adjuncts peanuts?
But wait, there’s more
The sequester is adding to the diminishment of consumer purchasing power. On July 1, average weekly unemployment benefits dropped by $43. In some states it is double that. A growing percentage of the U.S. population is hand-to-mouth. A lost part-time job, a drop in unemployment benefits, and the economy shrinks.
Over the past two decades, the once fabulous U.S. economy has been destroyed by the manufacturing and financial corporations. Wall Street is the main culprit. There was a time when business schools taught, and corporations understood, that business had multiple responsibilities that included their customers, employees, communities and shareholders. Wall Street and its “free market” dupes eliminated all responsibilities exce
pt for shareholders. Once shareholders became the sole corporate responsibility, Wall Street threatened corporations with Wall Street-financed takeovers if they did not raise corporate profits by screwing customers, employees, and communities.
Corporate executives and boards, not wishing to be displaced, knuckled under to Wall Street’s threat. Corporations offshored employment to low-wage countries; they brought in lower-paid foreign workers on H-1B visas, lying to Congress that there was a shortage of qualified American workers; instead of hiring employees, corporations contracted with independent suppliers to provide a temporary work force.
The old standby — start a business — is no longer possible. Main Streets are history. What small business is going to compete with chain restaurants, Walmart, Home Depot, franchised auto parts suppliers? Starting a business is what middle and upper middle class professionals do who are laid off. They start a consulting business and work for half the pay.
Financial institutions, such as banks, ceased to lend for the expansion of manufacturing and business activity. Financial institutions achieved concentration by changing the rules to permit national branch banking and the merger of commercial with investment banking. Local banks became branches of huge banks, such as Bank of America. Their function was no longer to finance local business, but to collect deposits that could be used for financial speculation in derivative, currency, interest rate, and commodity markets. The extraction of interest and fees from consumers and speculation in poorly understood financial instruments became the life blood of financial institutions.
Few, if any, including the Federal Reserve Bank, knew what they were doing. Consequently, today the consumer economy is mired in debt, deprived of employment, and without growth in spendable income. Recovery is not in the cards.
It is not only the U.S. economy that is closing down. The Italian Bureau of Statistics reports that consumer spending has dropped by 2.8%. The economy has been declining since the third quarter of 2011, and the youth unemployment rate is horrific. Greece, Portugal, Ireland, and Spain are in similar or worse situations.
With Western economies declining, China’s exports are falling. Chinese exports to Europe fell 8.3% in June. Exports to the U.S. fell 5.4%. China’s expected economic growth has fallen from double-digits to 7.5%, a rate unobtainable by any Western economy.
Houses of cards
The Federal Reserve in its attempt to keep the “banks too big to fail” solvent has rigged the bond market by purchasing $1,000 billion in bonds annually. This keeps interest rates low and, therefore, keeps the prices of the debt-related derivatives on the banks’ books high, indicating solvency where it does not really exist.
The bond market is a bubble, because the interest on bonds is below the rate of inflation. When a central bank is printing enormous quantities of money in order to fund its government’s deficit and to ensure the solvency of insolvent banks, it is a house of cards.
Generally, one house of cards suffices to bring down the structure. But the U.S. has three houses of cards. The second is the stock market. Stock prices are driven by the liquidity that the Federal Reserve is pouring into the banking system and by layoffs that reduce corporate costs and raise profits. Eighty percent of the trades on Wall Street are computer attempts to front-run buy and sell orders. The stock market is no longer a real market. It is a rigged market based on spun news and Fed liquidity.
The U.S. dollar is the third house of cards. The U.S. economy has been in relative decline for many years, and now it is in absolute decline. Foreign holdings of dollars from decades of U.S. trade deficits are voluminous. Sitting on these holdings of dollars, the world perceives the Federal Reserve printing 1,000 billion new dollars annually in order to support the banks too big to fail and the U.S. Treasury’s borrowing requirements.
The Chinese themselves, who have a big stake in exports to the U.S. from their own companies and from the offshored U.S. corporations that employ Chinese labor, have nevertheless allowed their currency to appreciate against the dollar, with the dollar losing since 2006 between one-fourth and one-third of its purchasing power against the Chinese currency.
Years ago, when I testified before the U.S.-China Commission, the U.S. economic establishment claimed that a 30% appreciation in the Chinese currency would suffice to bring U.S. trade with China into balance. Obviously, the economic establishment had no idea what it was talking about. And it still doesn’t.
With U.S. consumers too indebted to take on more debt, with job prospects dismal and consumer incomes falling, decline, not recovery, is in the cards. The Federal Reserve’s money printing policy is inconsistent with negative real interest rates and with a stable dollar. When the house of cards falls, Americans will face another wealth loss together with rising prices and rising unemployment.
In short, a wipeout awaits.
But Wall Street is in ecstasy, proclaiming recovery, the end of qualitative easing (the policy of supporting bond prices), and rising interest rates. One wonders what world Wall Street lives in. Rising interest rates would collapse the bond and stock markets. The solvency of banks “too big to fail” would take a hit from the falling prices of the debt-related derivatives on their books. If the Fed were actually to end qualitative easing, the Fed would be faced with the collapse of U.S. financial markets and would have to start printing again immediately.
So that’s where the U.S. stands. Without massive money creation, the game is over in the short-run. With massive money creation, the game is over in the long-run.