Horror Story

The economy burns while Washington fiddles—and what our chosen representatives and the administration are fiddling with is not the great American job machine, which, as June's downright putrid employment report demonstrated beyond cavil, badly needs cranking up. Instead, they are laboring unstintingly on how to plug the deficit gap by such smarmy tactics as changing the way inflation is reckoned to make it easier to stick it to the geezers.

Social Security and vets' disability payments are tied to the cost of living, and, in their infinite wisdom, the politicos have concluded that the current gauge overstates inflation. No less an authority—and we can't think of any less an authority—than Oklahoma Republican Sen. Tom Coburn is quoted by Bloomberg as saying: "There hasn't been any economist anywhere that says we shouldn't do that." The senator obviously needs to get out more.

For the life of us, we cannot remember any sober being in full possession of his faculties believing that the Bureau of Labor Statistics has ever overstated—and we must stress overstated—inflation. We have our reservations about the number crunchers, but none of them to our knowledge has exhibited an irrepressible urge to commit occupational suicide.

It's not the first time, of course, that Washington has sought to tackle the thorny issue of inflation by manipulating how the cost of living is calculated (elimination of food and energy when they were rising vigorously, remember, gave us "core inflation," which just happens to invariably lag behind plain old inflation).

Understand, we hold no brief for the particular yardstick Uncle Sam uses to measure the cost of living. Quite the opposite: With something approaching glee, we've passed along, from time to time, John Williams' blistering critiques of it from his perch at Shadow Government Statistics. However, John's take is that for decades, the rise in the cost of living has been greater than the official measurements indicate. It's just that we think such silly tinkering is symptomatic of how much at a remove Washington is from what's happening to the economy (and just about everything else, for that matter).

The atrocious June job numbers bring that disconnect into sharp relief. Although the incurable bulls strained to put a smiley face on the report, prattling on about a soft patch and trying to change the subject to the second half of this year, which they naturally envisioned as a period of quickening recovery, unimpeded by the absence of stimulus, the continuing drag of a bum housing market and a dismal job picture.

Give us a break. Which, come to think of it, is just what the bulls may get, but not, needless to say, the kind they're looking for.

THE STREET SOOTHSAYERS WERE A TAD OFF in their prognostications, anticipating a rise in payrolls to around 125,000. In fact, a grand total of 18,000 jobs were added. That was the feeblest increase since September of last year, in case you're keeping score. Moreover, the two previous months were revised downward, by 29,000 in May and 15,000 in April.

And if you add the 131,000 slots plucked pretty much out of the thin air by the BLS's birth/death computer models, what our friends Philippa Dunne and Doug Henwood at the Liscio Report dub "an unspinnably disappointing report" becomes even more disappointing. The private sector generated 57,000 jobs, while government at all levels subtracted an aggregate 39,000.

The unemployment rate edged up to 9.2% from May's 9.1%, and would have been a bit higher but for the shrinkage in the labor pool, which occurred likely as not because more folks without a job got discouraged and stopped looking for one. Even working stiffs had something tangible to beef about: Earnings in June fell a penny an hour, and the workweek contracted as well.

As Philippa and Doug comment, there were "no consolations in the household survey," which showed a loss of 445,000 jobs, and, even adjusting to match the payroll concept, was down a not-inconsiderable 401,000. They note with some dismay that the rise in unemployment was most emphatic "at the extremes of the duration spectrum, which includes those jobless five weeks or less at one end and people out of work for 99 weeks or more." They call the increase in the ranks of the newly unemployed especially "alarming."

What we find alarming as well is the rise in U-6, which includes both the unemployed and underemployed, to 16.2%, from 15.8%. This all-inclusive category hasn't been so high since back in December.

And while there are roughly 14 million people out of work by the usual count of unemployment, there are, uncomfortably, some 25 million by the U-6 measure.

That translates into an awful lot of unhappy people. And, if nothing else, we have a hunch that many of them may decide to vote come next year's election. Consider this a heads-up to any stray pol who can read the report without making his lips tired.

THE ESTIMABLE DAVE ROSENBERG, Gluskin Sheff's man about markets and economies, calls the employment report a "mega reality check." Like Philippa and Doug, he views the jobs tally as "horrible…not just the headline but also the details." And it casts severe doubt, he feels, on the popular notion among many economists and strategists that the lag in growth in the first half of the year can be blamed on myriad transitory factors.

Obviously, Dave says, last month's consumer-confidence surveys were so weak because of the crummy job market, which, we might add, somehow seemed to elude the ken of any number of economists and strategists. And the dismal employment situation reflects in no small way why the private sector is hiring so gingerly.


Pure and simple, business is jittery about the macroeconomic outlook, "especially with the Fed fading into the background and fiscal policies swinging from stimulus to restraint."

While, he allows, employment picked up some earlier this year, the uptick was largely in response "to the psychological effects of illusionary prosperity" inspired by the monetary and fiscal largess unleashed last fall. As it emerges, these stimuli gave the economy a "brief sugar high, with no lasting multiplier impact."

Now the policy cupboard is bare, and "we can see what the emperor looks like disrobed. It's not a pretty picture."

The economy, Dave goes on, is in a very fragile state. Which isn't all that surprising since it still bears the scars of the credit and market collapse and the Great Recession that accompanied it.

However, historically, such ugly episodes—and there are quite a few slumps and crashes in the postwar period—are not typically followed by recoveries as flaccid and as pathetic one has been.

Particularly rare is to see an economy that's supposedly well into recovery produce the likes of a puny 18,000 monthly job gain. For a recovery worthy of its name, Dave contends, celebrating its second anniversary you would expect employment to rise more on the order of 180,000. It's hard to overlook that missing zero in Friday's headlines.

Scanning the gory details of the data, Dave notes that the total of unemployed in June swelled by 173,000 and exceeded 14 million for the first time this year. Including discouraged workers, the pool of available labor soared by 483,000 to 20.6 million, which works out to seven people vying for every job opening. The normal ratio is close to three.

The logical question, he writes, is what are the prospects for a rebound in July? Not great, he says. In the June report, virtually all the tell-tale indicators of what's ahead—temp hiring, the decline in the workweek, since "hours tend to lead bodies," and the revisions, which have a habit of feeding on themselves—were negative.

In his summing up, Dave points out that: "Here we are, two years into an economic recovery, and the level of employment at 131 million is actually lower than it was in March 2000. At this stage of the cycle, what is normal is that payrolls are making new cyclical highs. This time around, barely 20% of the recession losses have been recouped."

He scoffs at the "myopic attention paid to a second-half revival," which he considers "a classic failure to look at the forest past the trees." The U.S. economy, "sadly enough, is saddled with numerous structural headwinds from excessive noncorporate debt, excessive housing inventories, excessive reliance on imported oil and excessive labor-market supply."

And he adds, facetiously, "Did we mention excessive denial?"

Dave, as our readers doubtless know, is given to morose musings about the economy and the markets.

But you disregard his cautions at your peril. He was indisputably on the money in plugging for bonds when just about everyone on this aching planet was bearish. And Dave has also been right as rain about gold.

One small absence in his list of excesses currently bedeviling the economy: He didn't comment on excess of blockheads in Washington—perhaps, we suspect, he believes that's a given.