The Real May Unemployment Rate Is 13.4%

For newer readers, I do an in-depth post on the "real unemployment rate" a few times a year - the last version was in [Apr 3, 2009: Real March Unemployment Rate Reaches 12.5%], so you can see definitions and methodology for 'reality' there.

Most other months, I just do a Cliff Notes version similar to what I did last month [May 8, 2009: Real April Unemployment Rate Reaches 12.9%]. Let me reiterate as I always do in these posts; this number really only matters to economists or those seeking truth. To market participants, it's more or less a game of cat and mouse, and as long as things are in line with expectations directionally, if not on an absolute valuation - all is well in the world.

I wrote last month:

From here on out, as the federal government jobs start coming hot and heavy and the economy stabilizes, I'd expect some months of 300K to 400K of job losses and then we'll improve to 100K to 200K a month later in the year.

I predicted in 2008 we'd see a 10% "government reported" unemployment rate which would mean in real terms (how the government used to measure things before they realized we could not handle the truth) 15% unemployment rate by the time this is all said and done, and I stick to it.

I thought this month we'd report closer to 500K (high 400Ks at best) per government reporting, 300K print surprised me... as it did everyone else. But I stick with what I wrote above...

Here's a Cliff Notes Version of why I say the Unemployment Rate is 13.4% (roughly). Since the early 90s, changes have been made to record-keeping methodology which skew the numbers higher than how they were reported before that time frame. So comparing numbers in the 90s / 00s to the 70s / 80s is not apples to apples. The closest approximation I can get to the old methodology is adding the "reported" rate (9.4% this month) to the delta between the broadest rate (U-6) and the "people who have been explained away over the years by government jiggering of report". This can be seen in the chart below (the difference between the blue and gray lines) and has been about 4% the past few months. So 9.4% + 4% (the delta) = 13.4%. Perhaps it's 13.2%... perhaps it's 13.8% - the exact number is not the issue; the fact we are off by this magnitude since we've made changes is.

Some will say the gray line U-6 (aka the broadest measure of unemployment) is the true rate, but a portion of those people are working, but only part-time although they wish for full time work. So they would not have been counted in the 70s or 80s either... they are just people who are underemployed. I don't count them in my "unemployment rate," as I am trying to simply quantify what we'd be reporting if it was 1982 and we still lived in a world of reality, rather than acting as ostriches in a "we can't handle the truth" world.

*********************

So from there here is the top line look: 345,000 jobs lost with an astounding upwards revision to the previous 2 months of 82,000. I say astounding because almost every economic report the past 6-8 months has been number X and then revised down to Y 30 days later (of course the stock market jumps on the X number as "better than expected"). This is the first time in ages I can remember it going the other way.

Now keep in mind we are spending nearly $800B to create "or save" 3.5 million jobs per the stimulus plan so we better get at least 1 million jobs out of it! You know, $800K per job!

Here are the lurid details, I am going to list the last 3 months (May, April, March) so you can see the progress where applicable

Government presented unemployment rate:

1. 9.4%
2. 8.9%
3. 8.5%

The unemployment rate per my best estimation:

(should be very close) as presented pre-early 1990s adjustment i.e. how the data was presented in the 80s, 70s, 60s et al

1. 13.4%
2. 12.9%
3. 12.5%

The broadest measure of unemployment and underemployment:

(people unable to find full time work or at jobs outside their field, et al) (U-6)

1. 16.4%
2. 15.8%
3. 15.6%

Now 2 places we add jobs almost every month are government and healthcare - also are the 2 entitlement programs that will eventually bankrupt the country, but for now we're just happy we can create jobs there... because the private sector is unable to. Here is the pattern in government jobs- remember last month 66,000 census jobs were created while March was the first time I can recall the number of government jobs decreasing. Considering our states are in complete budget disasters, it is remarkable the job gains in government just keep on going or at worst are 'flattish'.

1. -7,000
2. +72,000
3. -5,000

Private sector job losses (this includes "gains" from the birth / death model)

1. Can't find it this month yet, will come back to fill this in
2. 611,000
3. 693,000

The average work week actually got worse... somehow, from the lows the past two months, which were records. So as a median... people who are working, are working at below 80% of the "normal workweek"

1. 33.1 hours
2. 33.2 hours
3. 33.2 hours

How are their wages doing? They continue to suffer, and continue to go in the wrong direction - in March we were at least at +0.2% gain, now this is the second month at +0.1%. Remember multiply this number by 12 to get an annual 'wage inflation' 0.2% = 2.4% annual, 0.1% = 1.2%. Inflation, brought on by the Federal Reserve, will scar the American consumer.

1. 0.1%
2. 0.1%
3. 0.2%

Now one of my favorite statistics... the birth / death model which is an estimate of businesses too small to measure, so the government guesses - has been positive almost every month during this entire recession. Apparently thousands upon thousands of small business are sprouting across America creating a bevy of jobs

1. +220,000
2. +226,000
3. +114,000

I want to show you those 3 in series because as the nation loses millions of jobs, the government is saying businesses too small to measure created half a million jobs in the past 3 months. Which is why I say even my 13.4% rate is conservative. For example the government 'guesses' that 100,000 construction jobs have been created the past 3 months (fully 1/5th of the birth death model gains) in businesses too small to measure. I'll let you decide for yourself what fantasy world you want to believe.

Here is a new statistic I am just beginning to track

• The number of people who've been out of work longer than six months rose by 268,000 to stand at 3.9 million. Representing 2.5% of the workforce, this figure marks the highest seen since 1983.

To end, the average hourly wage in America is now $18.54 - roughly $38,500. (before taxes) Meaning half the country is below that, and half above. Most readers I am sure are above... but try to imagine living your life in this cost of living environment on $20-$30K (before taxes) where 1/3rd of the country lives. A basic roof over your head in many cities is say $700/mo = $8400 a year. One can do the math from there... Walmart Nation is only growing.

************

So in reality, this is an improvement (as we expected) from the hell that was last winter. If I add back "reality" to what the government says, we improved from losing about a million jobs a month during the worst of it, to losing about 600K this month. To put this in perspective, we lost about 150,000 jobs a month on average (with some spikes higher but nowhere near half a million) during the recession at the beginning of the decade. Worked hours continue to falter, and wages stagnate. Inflation adjusted wages continue to go backwards... after stagnating the entire decade.

I continue to expect this report to improve and then a lot of joblessness in America to persist throughout 2010. There are no real job drivers to create millions of jobs as the housing boom did in mid-decade. So instead we await China to save us, and our government to create new jobs for us - more costs for our grandchildren to bear. The next job wave will come from the bubbles the Federal Reserve is in process of creating today. And we'll continue the bubble bust economy from here til ?

Let me conclude with a green shoot; as more Americans lose their jobs and stay unemployed, this reduces the costs in corporate America. More work is shuffled to the remaining workers (we call these productivity gains) and corporate profits can go up. Hence CEO bonuses can burst and then we can start talking "trickle down economics" again - although it's failed for a decade. So high 5 a CEO as you walk by... corporate profits should be surging from here. S&P 1200 with gas $4 and true unemployment 16% should be a powerful combination.

Comments

[Dave Wrixon]

Yes, it is all semantics until you start consider the Federal Budget. Somebody at the end of the day ( probably not during this administration) is going to have to square the social cost of unemployment with the reduced tax revenue due the reduction in incomes associated with that unemployment. Only when the World at large sees some plausible attempt at doing this are they even going to start considering the US as a potential target for capital investment. Until that time things can only get worse. Sure you can paper over the cracks with more stimulus, but the underlying structural problems won't go away.

2009 Jun 07 09:44 AM

[ed233]

This is an excellent report . However, I don't think the green shoots people are going to be overly impressed. It confirms what I've written in the past concerning production. Companies are or will operate on skeleton crews. These companies will become reluctant to hire to increase capacity where demand for their product remains at fixed levels or spotty with little chance for improvement. Add to that increased taxes from the Obama administration and you have a recipe for a long period of stagnation. The real problem going forward is social unrest and resentment against those who are gainfully employed by companies unwilling to hire until the bottom line namely, profit justifies recruitment. Where you have only a skeleton infrastructure to maintain orderly conduct then look to see tea parties becomming more like revolutionaries. In a country where the right to bear arms is protected it leaves too many prepared to take the law into their own hands which could become a chronic problem especially when states threaten to release criminals for lack of funding. LOL Looking after your money.

2009 Jun 07 10:16 AM

[Graham and Dodd Investor]

A great, well written piece, providing an incisive alternate view of the unemployment rate. So much so, that I linked my own June 7th unemployment piece to this one (in a post script), and have become a fan of Trader Mark's.

2009 Jun 07 10:29 AM

[Steven Hansen]

i hope the reason the comment stream is not more vibrant is that everyone already knew this.

2009 Jun 07 01:49 PM

[moron]

"i hope the reason the comment stream is not more vibrant is that everyone already knew this."

One would think; however, each week the market continues to advance the more I doubt the awareness of investors beyond what the spin from CNBC tells them (not that I ever had much faith in the first place).

Ignorance is bliss...until its not.

2009 Jun 07 01:59 PM

[Mono]

steven-

i think that is the reason for not a huge outcry...most people have been seeing the MTM employment rates.

sad

2009 Jun 07 02:00 PM

[Fighting Yoda]

I estimated the job losses last month as 1.35 Million. Read my other post:
seekingalpha.com/artic...

2009 Jun 07 02:05 PM

[RiskReturnOptimizer]

Long XLE, hedged with short XLY (discretionary) is best strategy until unemployment rate stays flat, and savings rate stops going up.

2009 Jun 07 02:36 PM

[Ellito]

If you pay so much attention to these stupid data,
you will never achieve anything in life.
You will worry to death.
Wake up, it's a cycle,
go invest and you'll be happy next year.

2009 Jun 07 02:46 PM

[John Lounsbury]

TraderMark - - -

You wrote:

"Let me conclude with a green shoot; as more Americans lose their jobs and stay unemployed, this reduces the costs in corporate America. More work is shuffled to the remaining workers (we call these productivity gains) and corporate profits can go up. Hence CEO bonuses can burst and then we can start talking "trickle down economics" again - although it's failed for a decade. So high 5 a CEO as you walk by... corporate profits should be surging from here. S&P 1200 with gas $4 and true unemployment 16% should be a powerful combination."

I recognize the cynical (facetious?) tone of your statement. However, there is a relevant historical connection. First with Hoover, and then continued by Roosevelt, there was an effort, through cajoling and moral suasion by the federal government, to maintain wage levels when everything else was deflating. The result was that unemployment rates went much higher than they would have if market forces had driven wages down and more people had remained employed. The high unemployment further depressed consumer demand, aggravating the depression. It wasn't until the Roosevelt second term that the government interference with market force determination of wages was largely abandoned. By then, poor tax policy and the previous high unemployment had driven the country back into a sharp recession (1937-38).

Using your terms, TraderMark, you could have high fived the CEOs during the 1933-36 time frame, as GDP experienced the largest surge in our history. But the average American was not included and there was no return to prosperity.

History may not repeat itself exactly, but someone has said it surely rhymes. There are times to use the rhymes and there are times to start a new verse.

2009 Jun 07 03:35 PM

[herbert hoover]

talk to goldman sachs. they're the major driver of oil prices


On Jun 07 06:52 PM subsonic wrote:

> OIl need to be at $10 barrel. I'm tired of funding terrorists with
> petro dollars.
> When folks finally see that they can’t just get someone else to pay
> for all this, there will likely be a huge tax rebellion which will
> cause more short term problems, but may in the long term (hopefully)
> have the effect of getting the government to manage our money better.
>
>
> In the meantime, let’s hope we don’t have too many large national
> disasters, military conflicts, pandemics or the like to deal with.
> This country is in a lot of trouble and we need to start thinking
> like Americans instead of Republicans or Democrats if we’re going
> to get through this mess……..
>
> good articles: fhurl.com/c9055 recommended reading

2009 Jun 07 07:53 PM

[conceptwizard]

SGS Alternate unemployment is 20.5% and rising . If your going to count the numbers count them all.

2009 Jun 07 08:01 PM

[MrZack888]

you either have protectionism, or unemployment checks. Put up tariffs on certain industry sectors of Americas manufacturing, use that tariff as government funding so the cunt U.S. government can cut taxes and entice businesses and consumer spending. but it would make too much sense because big outsourcing multi-national global corporation and banks control America's government, and is hell bent on destroying the middle class of the world with their neo-liberal criminal syndicate modern day slave wage globalization fake free trade efforts to bring about a one world government.

2009 Jun 08 12:20 AM

[Homer II]

Hmm.. it is already apparent (to me at least) that we are slowly sliding into a depression which could last as long as the first GD and possibly cause greater dislocation. The Fed wants desperately to keep/force lending rates to stay low as possible to provide somewhat of a safety net catching the tsunami of ARM resets coming. But, the upward pressures are too great for Bernanke and Geithner to hold back. Add the current unending malaise to what is approaching and you can see why. Very scary for those, trying to run and hide.

2009 Jun 08 01:10 AM

[fxmaven]

I don't see US corporate profits growing to the point where 1200 on the S&P is feasible. Profits will be in the $45-$60 range and P/E will most likely range from 12-15 X. That gives an extreme low of 540 (going below the march lows) and maximum possible of 900 on the upside. This assumes a USD/Euro rate between 1.25 and 1.5, so if Bernanke and Geithner zimbabwify the dollar all bets are off, US MNC's can add zeros to their bottom line with little or no effort.

Yes, it means we are overbought at the moment.

2009 Jun 08 05:20 AM

[Dan in mpls]

You say that its tough to get by on $38,500.00 a year or 20 to 30k. Im sure it is but I get so sick of how out of touch most people seem to be with the real world of the "poor". One certainly can get by on $20K a year and many more have to learn to. I rent rooms in my home for $400 a month, all utiltes paid. The rest you can guess. My point is that Obama should offer real help to the "poor" by lowering the minimum wage to say, $4.50 an hour or kill it all together. I myself would hire more help to run my coffeeshop and hotel. Most importantly, the "poor" who for the most part are people who have never had to really work and never learned to, might learn some job skills. I am certain that that is where this is all going and we will all get by.
P.S. As God is my witness, I have one of the missed unemployed Americans sleeping in an empty hotel room. Hes been taking his kayak across the river to sleep in a tent out on an island but its raining today. He is a father now and just got a bill from welfare for $68,000. to prove it. Last year he wanted $25. an hour to work, yesterday the idiot at my T bone steak. Better crack your copy of The Grapes Of Wrath. They are souring as we speak.

2009 Jun 08 07:44 AM

[Jackafuss]

A considerable portion of the spike has been caused by the easing of filing requirements. Today, if you worked 31 days during the past 2 years, you can draw full benefits. A lot of retired people are drawing unemployment right now because they did a couple of part-time jobs.

Jack

2009 Jun 08 08:36 AM

[spald_fr]

TraderMark writes: [To end, the average hourly wage in America is now $18.54 - roughly $38,500. (before taxes) Meaning half the country is below that, and half above. Most readers I am sure are above... but try to imagine living your life in this cost of living environment on $20-$30K (before taxes) where 1/3rd of the country lives. A basic roof over your head in many cities is say $700/mo = $8400 a year. One can do the math from there... Walmart Nation is only growing.]

Wow, that's an eyeopener.

Given these financials, it's no wonder people look to the government to provide basic services such as housing, food, education and health.

This is not my father's "Middle Class" anymore, where "being on the dole" was something to be avoided at all costs.

I'm not making a moral judgement here but an observation: A good portion of our "middle class" will become wards of the state.

2009 Jun 08 09:07 AM

[john s. gordon]

or maybe it's 20%. only active seekers are counted.

lots of people gave up looking long ago because no jobs exist.
> jack

2009 Jun 08 09:13 AM

[robert.b.ferguson]

Good article. However it's not that we can't handle the truth it's that our government can't handle the political consequences of owning up to their misdeeds. Rumple stiltskins has got nothing on the current crop of spin doctors.

2009 Jun 08 09:16 AM