Shockingly Weak Jobs Report Shows Fed is in Another
by the Curmudgeon with Victor Sperandeo
The Curmudgeon reviews the disappointing May jobs report and submits that the Fed's seemingly endless talk the talk is misplaced, while its economic survey data on a tight job market is flat out wrong. Victor expresses his candid opinions on the Fed's mind set and concludes they're in the Twilight Zone. The Curmudgeon certainly agrees!
Jobs Report Summary:
How could they have gotten it so wrong? Shortly before the BLS announced the shockingly poor employment situation report Friday morning, economists and market analysts surveyed by CNBC had estimated between +145k to 190k new non-farm jobs were added in May 2016. In fact, only +38K new jobs were created in May, which was the lowest monthly growth since September 2010.
The Labor Dept. also revised down the March and Aprils employment totals by 59,000. April's 160K new jobs, which already looked like a downshift from 200K+ from previous months, was revised down to 123K. March was also revised down from 208K to 186K. The average monthly gain for the last three months was a puny 116,000 jobs. That was the lowest three-month average level since 2012, according to Citi Velocity.
Despite the anemic job gains, the official unemployment rate, (which is based on a separate survey of households), fell to 4.7%, its lowest point in nearly a decade. But the decline was primarily a result of Americans dropping out of the labor force rather than finding new jobs. The labor force participation rate declined for the second consecutive month, to 62.6% while the number of people working part time for economic reasons rose sharply.
The latest payrolls numbers were affected by a strike by 35,000 Verizon Communications workers that began in late April and stretched through May. But even excluding that effect, the jobs report was very bad.
1. Barron's reports 664,000 people left the work force in May. That figure is unusually high. This now brings the worker participation rate to 62.6% (almost a four decade low) and that caused a headline unemployment number 4.7%.
2. We've many times called attention to the Birth Death Model, which adds approximately 72,000 jobs that are estimated, but never really counted. If that were subtracted, the result would be a DECLINE in jobs of -34,000. Please refer to the subhead: Phantom Jobs Created by "New Companies" Which Don't Really Exist in this Curmudgeon post.
Fed Rhetoric Misplaced:
Boy, this is ugly, Diane Swonk, an independent economist in Chicago, said about the jobs report. The losses were deeper and more broad-based than we expected, and with the downward revision to previous months, it puts the Fed back on pause.
Yet just last Saturday, headlines in leading newspapers screamed the Fed would raise rates soon. The lead story in the WSJ was titled: Janet Yellen Sees Rate Hike Coming Soon (on line subscription required) with subhead stating Fed is on watch to move as economy shows signs of pickup.
Its appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate, Fed Chairwoman Yellen said during a panel discussion at the Radcliffe Institute for Advanced Study at Harvard University.
Ms. Yellens comments on a possible rate increase echoed those of other Fed officials who had said they see two or three rate increases this year and could see moving in June or July. Why can't Yellen and other Fed officials just keep quiet and stop confusing the markets?
Moreover, the Fed's surveys don't seem to be accurate. The central banks anecdotal Beige Book report, released on Wednesday, indicated that tight labor markets were widely noted in most of the Feds dozen districts around the country. Tight labor markets, with the labor participation rate near a four-decade low of 62.6%? Who's kidding whom?
ShadowStats Report No. 810 - Labor Conditions, M3, Trade Deficit and Revisions, Construction Spending:
In a June 5th report for subscribers, ShadowStats' John Williams made the following observations on the Fed and the U.S. economy:
· As Happy Economic Data Evaporate, Chances for an FOMC Rate Hike and Perpetual Fed Propping up the Dollar and Stocks Will Diminish
· Plunge in the Headline Unemployment Rate Came from Unemployed Leaving the Labor Force, Not from Finding Jobs
· The Labor-Force Participation-Rate Measure Favored by Fed Chair Yellen Shifted Negatively to 62.6% in May, from 62.8% in April
· Despite Collapsing April 2016 Real Construction Spending, Broad Activity Continued in Low-Level, Stagnating Non-Recovery
· Commerce Department Moved to Reduce the Trade Deficit and to
· Boost the Headline Economy by Redefining and Gussying-Up the Trade Surplus in the Otherwise Fluffy-Services Sector
· Hard Detail from the Real Merchandise Trade Sector Showed a Deeper Deficit and Weaker Economy in Revision
· While some elements of April 2016 headline economic activity showed heavily-touted, relative monthly pick-up, those gains arose largely from one-time events or seasonal-factor distortions that should reverse or not be repeating in May.
· Where some positive reporting surprises are inevitable, downside surprises and negative revisions to prior periods should become the dominant trend in the months ahead.
Victor's Comments and Opinions:
The English Poet Percy Bysshe Shelley (1792-1822) concisely explains the Fed's seemingly incoherent mindset (emphasis added):
"Government is never supported by fraud UNTIL it cannot be supported by reason."
In the first week of May, the Fed did not want the dollar down. I believe they were worried that a weak US $ might cause oil prices (inversely correlated) to rise to a point that it would slow consumer spending.
We wrote about dollar manipulation in Potpourri of Observations on Economy, Markets and Politics:
The US dollar index dropped six days in a row from a trading high of 95.18...As the decline began to accelerate on the broken support, two FOMC members saved the day by talking (or jawboning) up the dollar. Fed members John Williams (San Francisco Fed) and Dennis Lockhart (Atlanta Fed) said the markets are underestimating rate hike odds and investors dwell on downside risks.
After the jobs report was released on June 3rd, the DXM (June US $ futures contract) closed at 93.88, which was down -1.686 or (-1.76%) for the day. Contrast that to the May 31st DXM close of 95.88, which was the monthly high. Hence, the dollar gave back 41% of its May rally in one day. Do you think the Fed was pleased with that?
With 100% confidence we can now say that the much hyped talk of a June rate increase won't happen, especially with the Brexit UK referendum a week after the Fed's meeting. According to the CME Fed Watch Tool, theres only a 3.8% chance of a Fed rate increase at the June 15th Fed meeting.
As this is an election year, a rate increase in July or later becomes a grave risk to the Democrats. What if something else goes wrong with the global economy? Janet Yellen and her Fed cohorts are Democrats, so it will not happen. Forget about a Fed Funds increase this year!
Curmudgeon Note: The CME Fed Watch shows a 30.2% probability of the Fed Funds rate increase of 25 bps at the July 27th Fed meeting.
The Fed continues to make "rope-a-dope" excuses for what it says it is going to do, or when it changes its mind whimsically.
The Financial Times June 4th editorial (on line subscription required) "The Fed faces bigger problems than Brexit" is against increasing rates.
True, the Fed has been paying more attention than usual to international events over the past year, expressing concern about volatility in financial markets and the threat of global economic turmoil." They mean China!
The editorial stresses that the Fed should wait for inflation to occur before raising rates, and not to jump the gun of anticipating it, which they did on December 16, 2015 with their 25 bps increase. This was more than having "egg on their face" as it reflects ignorance and arrogance. The Fed claimed increased "inflation expectations" when they raised rates last December, yet there were no signs anywhere of that.
Isn't the Fed's twin "mandates" price stability and full employment? In this regard the Fed uses the mandates excuse when it's convenient for them to con the public.
Also, they changed the definition of price stability to mean a 2% inflation rate per year. This is really a yearly tax on "the people," but it cuts the US debt in half every 36 years so who cares?
The question to be asked is what is the true AGENDA of the Fed?
Consider the statement of Representative Louis McFadden, Chairman of the House Committee on Banking and Currency in 1930 (emphasis added):
The Federal Reserve Bank of New York is eager to enter into close relationship with the Bank for International Settlements . The conclusion is impossible to escape that the State and Treasury Departments are willing to pool the banking system of Europe and America, setting up a world financial power independent of and above the Government of the United States.... The United States under present conditions will be TRANSFORMED from the most active of MANUFACTURING nations into a CONSUMING AND IMPORTING NATIONS with a balance of trade against it.
- Rep. Louis McFadden Chairman of the House Committee on Banking and Currency quoted in the New York Times (June 1930)
What a soothsayer he was!
It seems that what the Fed says and what it does is to fool the people. Karl Marx once said about people that could manipulated to his advantage were "useful idiots."1
Note 1. Karl Marx is often credited with coining the term useful idiots, because of his statement: My adherents are useful idiots. However, Lenin and Stalin also used the term "useful idiots.
Fed monetary policy has entered "The Twilight Zone." As Rod Serling, the producer and screenwriter so aptly put it:
"You're traveling through another dimension, a dimension not only of sight and sound, but of mind. A journey into a wondrous land whose boundaries are that of IMAGINATION (emphasis added). That's the signpost up ahead. Your next stop, the Twilight Zone!"
Hello Fed, you're right there now!
Good luck and till next time...
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
Copyright © 2015 by the Curmudgeon and Marc Sexton. All rights reserved.
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