Jobs Report
Jude Wanniski
March 5, 2004


What in blazes is going on with employment? Once again, the forecasters all expected a sizeable increase in new jobs and were surprised this morning when the Bureau of Labor Statistics (BLS) reported a miniscule increase of 21,000 jobs in February, along with a downward adjustment to an already meager January number, so there is no gain for the year. Meanwhile, the household survey that showed an increase of 496,000 jobs in January reported a decline of 392,000 people leaving the workforce in February. Here is how the Joint Economic Committee of Congress put it in a statement released following the BLS report:

"Some commentators suggest that the drop in the unemployment rate over the past few months is misleading because many people are discouraged and have stopped looking for work (removing them from the calculation of the labor force and the unemployment rate).  However, BLS reports that the number of people wanting work but not looking is "about the same as a year earlier."  The household survey shows 392,000 people did leave the labor force in February, but people can drop out for a variety of reasons not related to employment (examples might include going to school, retiring or taking care of loved ones)."

If the JEC economists had checked the Wall Street Journal's page A2 this morning before they wrote the release, they would have learned "U.S. Household Wealth Hits Record." That`s right, household wealth is now estimated at $44.21 trillion, which is higher than the estimate of $43.58 trillion in 2000, just before the stock market "bubble" burst. This should mean to the JEC economists that the people who "drop out for a variety of reasons" should include their "wealth." The WSJ does not note the low point of wealth after the bubble burst, but it was probably about last March when the stock market hit bottom. We would guess $4 trillion in financial assets and home equity.

This should help explain why the unemployment is at 5.6% and productivity stats continue to rise. We warned explicitly last summer that because of the dazzling cuts in capital taxation last spring it would take until this spring before the number of jobs would reflect a real tightening in the labor market. On July 14, in forecasting a "Sawtooth Climb" in the new bull market, I wrote: "With the dynamic we are experiencing now, there is more of a lag because of the additions to the capital stock. Employers actually can satisfy order demand with the same number of workers and those who were about to lay off all their workers need only lay off half, as the turnaround appears at the margin. The unemployment rate may continue to climb for some time, but the only problem for the markets would be if the government decides to do something X, which would be negative, instead of a positive Y. The very best thing that could happen during the next few years would be a decline in the number of workers employed, but only for the reason that households can be managed with one breadwinner instead of two. For that to happen, one of the breadwinners has to be working in an enterprise where increased capital makes up for decreased labor. This goes back to the point that labor benefits most from a cut in capital taxation."

The net effect of the BLS report was a reaction in the gold price and the oil price we had to expect with a "weak" report. Gold goes up because the market assumes Greenspan`s Fed will not raise the 1% funds rate, which means more liquidity than less will go into the banking system. If the OPEC oil producers will get dollars worth less, not more gold, there will be less leakage in their production quotas. There will be less cheating, if you will.

We continue to believe the economy is stronger than the BLS report would indicate and that the "truth" cannot be contained for much longer, which is why the markets drove the gold price down to almost $390 earlier this week. Some clients have asked why I am so worried about "deflation" lately, to which I have responded that I am not yet "so worried." We are in a very cozy spot right now with a strong economy, strong stock market and healthy commodity prices. What concerns me is that it would not take all that long to see at least a "correction" associated with a drop in gold and nominal prices of commodities and equities. We do not think that the broad price indices will be going down in the near future, nor do we think that the unemployment rate will climb in the months ahead, even if millions of richer Americans who do not have to work suddenly decide they would like to get back on the job. This means we will remain on a deflation slope in the near term, which is nothing to panic about, but something to watch carefully.

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