What You’re Not Being Told About The Real Economy

Sunday, December 10, 2017
By Paul Martin

by Jeffrey Snider via Alhambra Investment Partners,
Dec 10, 2017

The year 2000 was a transition year in a lot of ways. Though Y2K amounted to mild mass hysteria, people did have to get used to writing the date with 20 in front of the year rather than 19. It was a new millennium (depending on your view of Year 0) that seemed to have started off under the best possible terms.

Not only were stocks on fire at the outset, the economy was, too. The idea of this “new economy” leading toward a permanent new plateau of low inflation growth, driven by the breathtaking productivity gains in telecommunications and computing, seemed quite real on the surface. US GDP advanced by more than 3% in 15 straight quarters from Q2 1996 through Q4 1999, averaging a sizzling 4.7% in those nearly four years of dot-com supremacy.

The labor market was clearly robust, too. In March 2000, the BLS estimates (current benchmarks) that total payrolls (Establishment Survey) rose by 468k from that February. That brought the 6-month average up to +303k, a record of expansion that also mystified economists for its lack of inflationary wage pressures. In any case, the late nineties had roared up to the doorstep of the 21st century.

We all know what happened in April 2000, as investors suddenly got cold feet about first the high flying NASDAQ. It wasn’t just stock prices and IPOs, of course, as it really meant one of the major economic themes of that age was in danger being undermined, if not thoroughly debunked. The new economy of the 21st century might not have been grounded so solidly in true economics (small “e”) as everyone thought (especially those running the Fed).

The labor market of 2000 was a study in contrasts, starting out as good as it did, but by that June, there was a shocking minus for the monthly headline payroll number. It wasn’t just a one-time problem, either, as despite all assurances in all the usual places payrolls would contract again in August and also in October. To end the year 2000, the 6-month average for the Establishment Survey had fallen to just +109k.

It was, again, a year of transition, beginning as the “sky is the limit” dot-com era and ending in almost a tailspin just two months shy of official recession. In many ways, the economy has never recovered from it, the labor market (the eurodollar’s giant sucking sound) most prominently.

Because of this and really the length of time involved between then and now, we have forgotten what a good economy actually looks like. There have been, of course, brief moments when we get the sense that something just isn’t right, such as the “jobless recovery” of 2002 and 2003, as well as the whole aftermath of the Great “Recession” up until 2014. By and large, however, the economy and the labor market are described in terms that just don’t apply if almost by default (it’s less bad today, so mustn’t it be good?).

The current payroll report for November 2017 suggests a gain of 228k. It is characterized as everything from “solid” to “robust.” Is it? How would we really know?

The best way to confirm that suspicion is to compare the current labor statistics to those in the past, calibrating the most recent numbers by those before that were recorded during what were inarguably the best of times; such as the late nineties.

Using monthly payroll gains, though, can be misleading simply because of geometric progression. A gain of 228k in November is not equivalent to the 228k gain in November 2000. The latter is actually a better single month result starting as it did from a smaller base.

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