Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

U.S. Unemployment Numbers Illustrate Retarded Economic Recovery

Economics / Economic Recovery Jan 11, 2010 - 12:38 AM GMT

By: Gerard_Jackson

Economics

Best Financial Markets Analysis ArticleWhen the official unemployment figure dropped by 0.2 per cent to 10 per cent the so-called media were quick to claim it as evidence that the economy was now moving in the right direction. But how could this be if firms were not hiring? To any reasonable observer of the economic scene it was obvious that the number of discouraged workers must be rising. The jury is now in, making this conclusion official: The Labor Department has reported that 929,000 "discouraged workers" ceased looking for work.


This dismal statistic is up from 642,000 a year earlier. Chris Rupkey, an economist with Bank of Tokyo-Mitsubishi, called the finding "astonishing" and estimated that if these workers were still included as part of the work force the official unemployment rate would be 10.5 per cent. Moreover, 20 per cent of working-age males are now unemployed. This is a staggering figure that reinforces the view that the real level of unemployment greatly exceeds the official rate.

The great majority of economists argue that the problem is weak consumer demand. What is even more troubling, in their view, is that persistent unemployment could result in a significant increase in loan defaults that would further retard economic recovery and create even more unemployment. The latest report from the Fed that consumer borrowing had fallen by $17.5 billion in November, the biggest drop on record, can only deepen the gloom, particularly in light of the fact that households are paying off debt and building up their savings rather than maintain their consumption. Well, they needn't worry because their analysis is wrong through-and-through. As Nassau Senior explained:

[T]he difference between saving and spending, is to be found in distinguishing... productive from unproductive consumption. To save is to consume for the purpose of reproduction; to spend is to consume for the purpose of enjoyment. The amateur who builds and mans a pleasure yacht, and the merchant who builds and mans a trading vessel both employ laborers to produce commodities and perform services. But the merchant uses the vessel and the crew for the purposes of reproducing an equivalent or mor than an equivalent for the cost of the ship, and the wages, and the victualing of the crew; the amateur uses both ship and crew for no purpose except his own amusement. (Nassau W. Senior, Industrial Efficiency and Social Economy, Vol. I, Henry Holt and Company, 1928, p. 142.)

Senior strengthened his argument by stressing the economic difference between building a palace and building a factory. He was pointing out to Malthus -- as did Ricardo before him -- that to "save is to spend" but to spend on capital goods, what the Austrians sometimes call "future goods", and by doing so adding to the future flow of consumer goods. (The majority of economist still do not differentiate between savings and cash balances.) The inexorable conclusion is that demand springs from production. (Say's law.) It follows that if 'demand' is weak it must be because production has fallen, which of course it has.

It ought to follow with equal clarity that as demand springs from production total economic activity must exceed the value of consumption by a multiple amount in a society that employs multiple stages of production. This is exactly what the Bureau of Economic Analysis found when it took into account spending on intermediate products, a fact that was accepted by many pre-Keynesian economists. Once we include total spending we find that consumer spending drops from about 70 per cent of total economic activity to about 33 per cent. Therefore it is not consumption that drives the economy but business spending. If this fact had been accounted for it would have revealed that the economy had indeed fallen into a depression. This would also explain why trucking has been hit exceptionally hard.

What follows is, unfortunately, not self-evident. The economy has a capital structure to which there is a time dimension, the key to which is the "natural rate of interest" (its market rate). As we live in highly advanced economies we should expect the boom-bust-cycle to have its greatest impact on manufacturing because this is where the most time-consuming processes are to be found. (The housing industry responds largely the same way, not because it employs roundabout methods of production but because the very high price of its durable product makes it particularly sensitive to changes in interest rates.)

The boom-bust cycle does have a specific pattern. The first thing to note is that manufacturing leads the recovery. When the boom is coming to an end this is first signaled by a contraction in manufacturing*. In other words, production leads consumption, with the higher stages leading the recovery. As we know, virtually the whole of the economic commentariat are focused on consumer spending. But if they were right then no recovery in manufacturing would be possible and yet the Institute of Supply Management reports that manufacturing is expanding with steel production and capital goods leading the way. The news was buried by reports that "U.S. consumers and businesses are filing for bankruptcy at a pace that made 2009 the seventh-worst year on record, with more than 1.4 million petitions submitted". Moreover, small and medium-sized businesses are still shedding labour.

These conflicting reports strongly suggest to me that the US economy is still badly out of kilter and that the increase in manufacturing activity might not be able to maintain momentum, especially once interest rates rise significantly. (The extent to which manufacturing activity is being driven by pure cost cutting and exceptionally low interest rates is generally overlooked.)

Obama's borrowing and spending binge point to an eventual rise in long term interest rates severe enough that if it does not kill off investment it will severely curb it. It can never be sufficiently stressed that sustained economic recovery means capital accumulation, otherwise called economic growth. Obama's policies are anti-growth, whether he knows it or not. His green jobs policy is a prime example of gross economic illiteracy and amounts to nothing but a 21st century version of pyramid building that will do as much for the American economy as did the building of the Palace of Versailles for the French economy.

There is no such thing as a spotty recovery. When an economy is making a genuine recovery from recession it does so in a set pattern. That pattern has yet to emerge. Moreover, a rapid fall in unemployment and a swift rise in output would not in itself mean a sustainable recovery was underway. Rising output simply means a reduction in idle capacity is taking place. What matters for real wages and hence living standards is a sustained process of capital accumulation that exceeds the rate of population growth. I just cannot see this happening to any meaningful extent under the present administration. I therefore remain as pessimistic as ever.

*Some people imagine that a consumer boom is no different from the usual boom-bust cycle. Hence all that is needed to achieve recovery is to focus entirely on consumer spending, even if it meant giving everybody a blank check. Once spending picked up the accelerator principle would kick in and the recession would be over. This ignores the fact that capital is heterogeneous and that there is a relative price structure. A totally consumer-oriented policy would result in a great deal of capital being abandoned in the higher stages of production. In this case we should expect the emergence of a "rust-belt". (William H. Hutt demolished the accelerator concept in his book The Keynesian Episode, LibertyPress, 1979, chap. 17.)

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2010 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules