IN THIS ISSUE:
1. April Unemployment Report – Good & Bad News
2.6.7 Million “Missing Workers” – Where Did They Go?
3.How Americans Really Feel About the Economy
4.Investors’ Long Love Affair With Bonds Continues
5.IMF Lowers Global Growth Forecast For 2013
Today we will touch several bases. We begin with last Friday’s unemployment report which was hailed by the mainstream media, but had a lot of bad news to go with the good. From there we look at the estimated 6.7 million “missing workers” in this economy and ponder if they’re permanently gone from the employment rolls.
Next we look at the latest Gallup poll showing how many Americans rate the economy as excellent, good, only fair or poor. You may be surprised at the results, which aren’t immediately clear in the chart. Following that, we look at some interesting data on mutual fund money flows which show that the love affair with bonds continues, and investor demand for stocks is waning.
Finally, the International Monetary Fund downgraded its global economic forecast recently, including its forecast for the US and most of Europe. I have included the IMF’s graphic that lets you look at each country’s forecast for 2013 and 2014.
By the way, we have a lot of charts and graphs today, so the letter will print longer than usual.
April Unemployment Report – Good & Bad News
Friday’s unemployment report for April was a little better than forecasters had predicted. Here’s the good news. The official unemployment rate fell from 7.6% to 7.5%. Total non-farm payroll employment rose by 165,000 new jobs in April, a little better than expected. The new jobs numbers for February and March were revised upward by 114,000 additional new jobs combined for the two months.
Another good sign was the fact that the unemployment rate managed to fall despite the fact that 210,000 people joined the labor force to look for work in April. In several previous months, unemployment had fallen simply because workers had dropped out of the labor force, either due to retirement or despair, and were not counted as unemployed.
The labor-force participation rate – the percentage of working-age Americans either working or looking for work – held steady in April at 63.3%. The good news is that it didn’t decline last month. However, that compares with the rate of about 66% that prevailed for many years before the latest recession. I will have more to say about the labor force participation rate mystery below.
Now for the bad news. The number of unemployed persons remained at 11.7 million in April. The number of persons employed part-time for economic reasons (involuntary part-time workers) increased by 278,000 to 7.9 million in April, largely offsetting a decrease in March. These individuals were working part-time because their hours had been cut back or because they were unable to find a full-time job.
The U-6 unemployment rate, which includes the jobless and people who are working part-time because they can’t find anything better, rose to 13.9%. The African-American unemployment rate was 13.2%. And the unemployment rate for people with less than a high-school diploma was 11.6%. About 4.4 million people have been out of work 27 weeks or more.
In April, 2.3 million persons were marginally attached to the labor force, essentially unchanged from a year earlier. These individuals were not in the labor force, but wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the four weeks preceding the April survey.
Among the marginally attached, there were 835,000 discouraged workers in April, down by 133,000 from a year earlier. Discouraged workers are not currently looking for work because they believe no jobs are available for them. The remaining 1.5 million persons marginally attached to the labor force in April had not searched for work in the four weeks preceding the latest survey.
Though the economy has added about 6 million jobs since the labor market bottomed in February 2010, the total number of non-farm payroll jobs in the US is still nearly 3 million lower than at its peak in January 2008. That makes this easily the worst job-market recovery since the end of World War II.
Yet the media just could not heap enough praise on last Friday’s better than expected jobs report, and suggested that the economic recovery has shifted into a new gear. What else is new?
6.7 Million “Missing Workers” – Where Did They Go?
As noted above, the labor force participation rate of 63.3% was unchanged in April. That is the lowest participation rate since 1979. The labor force participation rate in the US has been in a steady decline since the late 1990s as you can see in the chart below. The decline in the participation rate has accelerated since 2007. In the period from late 2007 to April of this year, apprx. 6.7 million people have simply stopped looking for work. The reasons why are not entirely clear.
As the labor force participation rate continues to fall, it is becoming an increasing topic of discussion. Economists speculate as to whether the decline is the result of the weak jobs market or because increasing numbers of Baby Boomers are retiring? Actually, it’s both.
Demographics and retirements certainly played some role, though economists cannot agree on the extent. About 6.7 million people have simply stopped looking for work since late 2007. Mind you, these are not people who collect unemployment insurance and send out resumes in search of their next job. These are people who – at least, temporarily – have exited the workforce altogether. While some of the missing workers have simply retired, as you would expect, most have simply given up looking for work. What they do to sustain themselves is not clear.
So, who are these “missing workers?” Unfortunately, no one knows exactly who they are, why they left, and if they’ll ever return. What we do know is that this loss of 6.7 million workers represents a huge loss of potential productivity in the economy. While economists have not concluded exactly how much this lost productivity hurts the economy, it is widely agreed that it is a hit to GDP.
The growing number of missing workers creates deep political and policy implications over the next decade for the economic and budget outlook. Missing workers translate to a decrease in tax revenue, coupled with an increase in the use of government benefits, such as food stamps and disability insurance. The number of Americans collecting food stamps and those collecting disability insurance both hit new record highs in 2012 (a subject for an upcoming E-Letter).
The answers to the missing-worker problem may not become clear until the unemployment rate returns to a normal level of roughly 5%. The Congressional Budget Office estimates that won’t happen until 2017, when the rate is expected to fall to 5.5 percent.
Only then can economists gauge if people have left the workforce because of a shortage of jobs, or if they’ve left forever because the economy fundamentally changed. If that’s the case, the US officially will become a place where the labor market has little use for millions of Americans.
How Americans Really Feel About the Economy
While you probably heard a lot of positive response to last Friday’s unemployment report, especially in the mainstream media, let’s take a new look at how most Americans are feeling about the economy.
Each day, Gallup tracks the percentage of Americans who rate economic conditions in the country today as “excellent,” “good,” “only fair” and “poor.” The results shown below represent a three-day rolling average. Daily results are based on telephone interviews with apprx. 1,500 national adults, with a margin of error of ±3 percentage points.
There are several takeaways from this Gallup chart. The most obvious is the fact that the percentage of people who feel the economic outlook is “poor” has fallen significantly from above 60% in late 2008/early 2009 to 31% as of the latest survey. The percentage of people feeling “excellent/good” has risen only modestly, but at least it’s rising.
What the chart above does not show is even more interesting. Each day Gallup asks Americans to rate economic conditions as “excellent,” “good,” “only fair” and “poor.” What is not shown above is that 45% responded “only fair.” That means that 76% rate the economy as only fair to poor. I don’t know why Gallup decided not to illustrate the 45% who responded only fair, but that would give a whole different perspective to this chart!
Investors’ Long Love Affair With Bonds Continues
In the second half of last year, as stocks rose higher and higher, many pundits forecasted a “great rotation” of investor money from bond mutual funds to stock mutual funds. The thinking was that with interest rates at historic lows and stocks trending higher, many investors would dump their bonds and herd into stocks.
While money flows into stock funds did increase somewhat last year and earlier this year, it certainly did not qualify as a “great rotation.” In fact, money flows into bond funds, especially taxable bond funds (including Treasury bond funds), continue to be very strong. And most recently, money flows into domestic stock funds are starting to dry up.
Here’s a look at the latest mutual fund money flow data from the Investment Company Institute (ICI):
In the second line of the chart, we see that money flows into domestic stock funds has slowed to a crawl, even though the major stocks indexes soared to new record highs this year. In two of the five weeks shown, domestic stock funds saw net redemptions. Why might this be?
Millions of investors were drawn into stocks and stock funds in 2007 and 2008, only to see their portfolios decimated in the bear market which saw the S&P 500 Index plunge over 50%. Many investors vowed at the time: If I ever get back to what I started with, I’m getting out for good. They got that chance over the last month, and the data suggests they took it and bailed!
Now let’s look at bonds. Specifically, look at the third line from the bottom which is “Taxable” bonds, including Treasury bond funds. Money flows there continue to be very strong despite the weakness in bond prices in January, February and early March.
Notice that in the week ended 4/3/2013, taxable bond funds took in a whopping $6.36 billion and in the week ended 4/24/2013 another $5.53 billion. Interestingly, these two weeks are the same weeks where we saw net redemptions from stock mutual funds.
So, the love affair with bonds continues! I still don’t think it will end pretty over the long-run, but for now bonds are still very popular. I’ll have more to say about how you can protect yourself from rising interest rates and falling bond prices in upcoming letters.
IMF Lowers Global Growth Forecast For 2013
On April 16, the International Monetary Fund released its latest global economic projections for 2013 and 2014. In its WORLD ECONOMIC OUTLOOK report, the IMF forecasts world economic growth of 3.3% in 2013 and 4.0% in 2014. That is a downward revision for 2013.
For the United States, the IMF forecasts GDP growth of only 1.9%, down from 2.2% in 2012. The IMF predicts the US economy will improve to 3.0% growth in 2014. Both IMF estimates for 2013 and 2014 were slightly lower than their January forecast. This surprised many analysts.
In particular, take a look at the numbers for the Euro Area. The economies of Italy and Spain contracted by -2.4% and -1.4%, respectively, in 2012. Both countries are officially in recessions, and growth for this year is projected to remain negative at -1.5% and -1.6%, respectively. France is also very close to falling into a recession.
And look at the falling numbers for Germany. In 2011, Germany saw growth of 3.1%, whereas in 2012 the rate fell sharply to 0.9%. For 2013, the IMF forecasts growth of only 0.6% for Germany. Looks like the weak euro economy will be with us for some time to come, which is bad news for US exports.
The strongest areas of growth are concentrated in “Emerging and Developing Economies” which include China, India and ‘Developing Asia.’ Yet these strong numbers were not enough to prevent the IMF’s latest global forecast from nudging downward in the April report.
Interestingly, the CBO still forecasts US GDP growth of 3.1% for this year as opposed to the IMF’s latest estimate of only 1.9%. The CBO also estimates 2014 GDP growth of 3.8%. Keep in mind that the CBO predicted 4.2% growth for 2012 when in reality it was only 2.2%. So don’t be surprised to see the CBO revise its numbers lower before long.
And Finally, A Word on SPECIAL ARTICLES
We have no way to know exactly how many of you read the columns I select for SPECIAL ARTICLES each week. Sometimes, most of the links pertain to the topics I cover in the E-Letters, but often they have little or nothing to do with the topic(s) I write about. Such is the case today.
What I try to do is select articles that I think are interesting but don’t have space to address them in the E-Letter. If I do say so myself, we’ve got some real doozies today.
All the best,
Gary D. Halbert
© Halbert Wealth Management