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Sunday, November 05, 2006

Contradictory Numbers on the Economy

Reports were issued last week about job growth, inflation and growing tax revenues lowering previously predicted budget deficit figures. Like everything else in economics, the numbers serve more as a political Rorschach test indicator of the observer than a useful measure of the economy worth using to support policies.

JOBS AND UNEMPLOYMENT -- Last week's labor numbers reflected both a drop in long term unemployment claims, an increase in first-time unemployment claims and the lowest overall unemployment figure (4.4 percent nationally) in four years. Conservatives viewed this as proof that tax cuts have stimulated the economy, producing more jobs. Wall Street viewed this as a sign that low unemployment would strengthen workers' position bargaining for wages, drive UP inflation, and make the Federal Reserve reconsider some interest rate hikes to thwart inflation.

The jobs numbers are troubling for two reasons. First, the overall unemployment calculation includes a recalculation of job growth figures from August and September that added 139,000 additional jobs. The constant readjustment of economic statistics from the government for the past few years is highly suspect. I don't recall a single readjustment that WORSENED economic news. Deficits were always miraculously smaller than predicted. Job growth has always been mysteriously greater than predicted.

The job numbers are also troubling due to the way they are calculated. Short term claims went UP, that's not good. Long term claims declined. However, that literally means the number of people filing for another week of benefits went down. It doesn't mean they found a job. It could mean they are still looking and ran out of eligibility. It could also mean they gave up looking. You are only "unemployed" if you report yourself as looking for work. If you lost your middle management job 6 months ago, looked for 6 months, didn't find anything and have given up for a while as you live off your spouse's income, you aren't unemployed. There's nothing "wrong" with this approach, but you have to be aware of what's really being reported.

Certainly for payrolls, it shouldn't be that hard for the government to accurately counts gains and losses. Every unique combination of a SSN and employer ID on THIS month's withholding payments is a new job. Every unique combination of an SSN and employer ID that was sending withholding dollars LAST month that ISN'T sending them this month is a job lost. Granted, there are exceptions to this based upon how some independent contractors get paid, etc. but it should be easier than the government is making it to report accurate numbers the first time. The constant revisions (always in the rosy direction) smack of incompetence at a minimum or outright manipulation. With the huge volume of highly leveraged derivative investments betting on stock values and macroeconomic factors, the last thing the world economy needs is any government purposely rigging numbers used in the game.

TAX REVENUES AND DEFICITS -- A growing economy adding jobs adds tax revenue on income and capital gains. All other things being equal, higher revenue reduces budget deficits and that's good. Right? Well, it depends on who is paying those taxes. If oil companies who raked in enormous profits from 5 months of $70 plus/barrel oil are paying those taxes, the income being taxed isn't being spread across the larger economy, it's going into the coffers of four or five giant, multi-national companies. If Fortune 100 companies are paying higher income taxes on bigger earnings, that may not help the overall economy if the profits are being increased by eliminating American jobs with off-shore workers making $0.40 on the dollar of American workers. Again, those profits are going into the coffers of large companies that essentially are NOT investing it within America but investing it overseas. That grows corporate profits, in some sense it grows the world economy, but it is not the boost to the American economy suggested by supply siders.

If the deficit is going down, that's good right? Well, it depends on why it is going down. Government spending with two wars going on is an even larger portion of overall GNP than normal. This may have something to do with the "growth" in the economy but in one sense, the economy may not have grown enough to reflect the true cost of the war. Stories were out last week as well about how the Pentagon has been preparing to unleash a flurry of orders for equipment to replace the equipment wearing out in Iraq. The orders will be issued AFTER the elections to avoid spooking voters with more bad news about the cost of the Iraq debacle. In reality, that equipment should have been replaced at the time it was truly worn out, before the military reached the point of operating on fumes, which would have INCREASED military spending over the past 2-3 years. Since no taxes have been specifically levied to pay for this war, all of that spending would increase the deficit. So is the "deficit" really only $248 billion for 2006? Not when the real bill comes due.

ANALYZING THE ECONOMY OVER TIME -- The media recently fixated on the Dow Jones Industrial Average reaching a "record" of 12,000. Us sophisticated investors know the DJIA reflects the dollar value of underlying stocks in the index and yet in large part is "just a number" since it doesn't reflect the value and growth of the entire universe of stocks -- it's not meant to. However, is the Dow around 12,000 today as good as the Dow around 12,000 in April 2000? I've seen arguments made both ways. If the DJIA is itself just an index, it just "is", it's an indicator. However, clearly if the Dow and the larger market it represents stayed flat for 5 years, investors would be better off taking their money out and putting it in T-Bills.

Clearly, that number combined with time and indexing of interest rates and inflation does mean something to investors. More telling, in a recent Forbes editorial, Steve Forbes recently promoted the idea of indexing capital gains for inflation before applying already lowered capital gains tax rates. If it is legitiamte for Steve Forbes to discount his capital gains before paying Uncle Sam, then it is equally legitimate for those watching government policies to do the same before determining if those policies are working as claimed. They're not. We're still WAY behind.