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2012 Volume Issue 7

March 15, 2012

For a downloadable version, click the following:

Road to Recovery March 2012

WILL THE ECONOMIC ROAD TO RECOVERY FOR THE U.S. BE A ROUGH, ROCKY, AND UPHILL STRUGGLE?

www.huffingtonpost.com

Conference Board Economists: U.S. Economy Transitioning To A New Normal
"The economy that we had before the recession is gone," said Kenneth Goldstein, economist at the Conference Board. "It's not coming back."The U.S. economy is transitioning to a new normal in which businesses invest less and consumers spend less than before the recession, Goldstein told The Huffington Post in an interview last week. As a result, he said, economic growth and job growth will be slower than before.

Fed officials, including Chairman Bernanke, have recently testified that the outlook for the job market and personal consumer spending is dismal.

www.econnewsletter.com

Chairman Ben S. Bernanke: Semiannual Monetary Policy Report to the Congress (February 29, 2012 and March 1, 2012)

www.federalreserve.gov

The unemployment rate remains elevated, long-term unemployment is still near record levels, and the number of persons working part time for economic reasons is very high.
Real household income and wealth were flat in 2011, and access to credit remained restricted for many potential borrowers.

Reporting by the media portrays little of such pessimism. What is really going on?

CHANGES IN THE EMPLOYMENT PICTURE

Civilian Noninstitutional Population

Civilian Labor Force

  • Employed
  • Unemployed
  • Unemployment Rate

Not in Labor Force

  • Labor Force Participation Rate
Noninstitutional Population and Labor Force
In 2009 there was a reduction in the Labor Force of 145,000; in 2010 a reduction 253,000; and 2011 a drop of 272,000. The last time there was a fall-off in the Labor Force was 1951 when it dropped by 191,000.

In 2009 there was a reduction in the Labor Force of 145,000; in 2010 a reduction 253,000; and 2011 a drop of 272,000. The last time there was a fall-off in the Labor Force was 1951 when it dropped by 191,000. This could have been related to the to the Korean War. From 1948 through 2011, the Labor Force has grown by around 1.5 million per year on average.

What this means is that in spite of adding 5.83 million to the Civilian Noninstitutional Population from 2009-2011, the Labor Force actually shrank by 670,000. Again, not only were the 5.8 million people (in a net sense) sidelined, but there were an additional 670,000 removed from the Labor Force for a total of 6.5 million that were added to those not in the Labor Force.

The Civilian Noninstutional Population (those 16 years and older, not in the military, incarcerated, etc.) consists of the Civilian Labor Force (Employed and Unemployed) and those not in the Labor Force (discouraged workers, retirees, stay at home spouses, etc.)

Summary – From 2008 through 2011

The Civilian Noninstitutional Population grew by 5,830,000; the Civilian Labor Force contracted by 670,000; and those ‘not’ in the Labor Force grew by 6,500,000. The net efect was a significant drop in the Labor Force Participation Rate. The Labor Force Participation Rate = Civilian Labor Force (Employed + Unemployed) / Civilian Noninstitutional Population

To make the effects more concrete, if we examine the negative impact on GDP both in total and on a per capita basis for the years 2009-2011 (using 2008 as a baseline when the Labor Force Participation Rate was 66% and the Unemployment Rate was under 6%), we can see how it increased the scarcity of goods and services facing the U.S. population. We will calculate this by estimating GDP per member of the labor force that is classified as employed and multiplying that figure by the shortfall of employment if the economy had achieved 6% unemplyment rate (the complement of an employment rate of 94%) and a labor force participation rate of 66%. By historical standards, these are rather modest goals.

Actual Nominal GDP per Employed
In 2011, employed Americans, numbering 139.9 million accounted for $15.1 trillion in GDP. This translates into $107,900 per person Employed.
Adjusted change in GDP per Employed
Nominal GDP and Employment Shortfall...in 2011: if the Labor Force Participation Rate was at 66% and the Unemployment Rate was 6%, 8.8 million more people would have been employed. Using the per employed average portion of the GDP ($107,900), an additional $949 billion could have been added.

Year ending 2011 annual figures…

  • In 2011, the Nominal GDP was $15.0944 trillion.
  • The Civilian Noninstitutional Population was 239,618,000
  • The Civilian Labor Force was 153,617,000 (with 139,869,000 Employed, and 13,747,000 Unemployed)
  • The Labor Force Participation Rate = Civilian Labor Force / Civilian Noninstitutional Population
  • The Labor Force Participation Rate = 153,617,000 / 239,618,000
  • The Labor Force Participation Rate = 64.1%
  • The U-3 Unemployment Rate = Unemployed / Civilian Labor Force
  • The Unemployment Rate = 13,747,000 / 153,617,000
  • The Unemployment Rate = 8.9%

1) Current Per Capita (Employed) GDP = GDP / Employed

  • = $15.0944 trillion /139,869,000
  • = $107,918 GDP / Employed

2) If the Labor Force Participation Rate was 66.0% and the Unemployment Rate was 6.0%...

  • Civilian Noninstitutional Population 239,618,000 X 66.0% = 158,148,000 Labor Force
  • Unemployment Rate = Unemployed / Labor Force
  • 6% = Unemployed / 158,148,000
  • Unemployed = 6% X 158,148,000
  • Unemployed = 9,488,880
  • Employed = Labor Force - Unemployed
  • Employed = 158,148,000 – 9,488,880
  • Employed = 148,659,000

3) Change in Employed [adjusted for 66% Labor Force Participation Rate and 6.0% Unemployment Rate] = (148,659,000 – 139,869,000)

  • Change in Employed = 8,790,000
  • Using GDP per Employed of $107,918…
  • 8,790,000 X $107,918 = $948.6 billion of GDP (or 6.3% of the 15,094 billion total GDP) that could be added if 8.79 million were employed and contributing to the GDP at the same current rate!
Annual Labor Force Change in 1990-2011
Since 1948, there have been only 4 years where the Annual Labor Force has shrunk, including 2009 (145,000); 2010 (253,000); and 2011 (272,000)

Prior to 2009, a negative annual change in the Labor Force has only occurred once, in 1951, since the Bureau of Labor Statistics began reporting it in 1947. Beginning with 2009, it has turned negative for three consecutive years.

Ages 16 and Over (the overall Employment Picture)

Again from 2008 through 2011, the Civilian Noninstitutional Population grew by 5,830,000 while the Civilian Labor Force contracted by 670,000 resulting in 6.5 million people being sidelined or added into the ‘Not in the Labor Force’ portion of the Civilian Noninstitutional Population (Civilian Noninstitutional Population = those not in the Labor Force and those in the Labor Force). The employment level dropped by 5,493,000 and unemployment increased by 4,823,000 contributing to an increase of unemployment rate by 3.2%, from 2008 to 2011.

Ages 16 and Over Employment Work-up
The Employment Picture: The employment level dropped by 5,493,000 and unemployment increased by 4,823,000 contributing to an increase of unemployment rate by 3.2%, from 2008 to 2011.

The Labor Force Participation Rate is the ratio between the Civilian Labor Force and the Civilian Noninstitutional Population. In the following chart we are showing the annual change in Labor Force Participation Rate from 2005 through 2011. Our reference to a negative annual marginal LFPR or marginal Labor Force Participation Rate helps to explain why there has been such a precipitous drop in the overall Labor Force Participation Rate over the last few years.

Marginal Annual Change LFPR
The annual change in the Labor Force Participation Rate for 2009-2011 resulted in the lowest overall Labor Force Participation Rates seen in 30 years.
2005-2011 LFPR Labor Force Participation Rate
Moving from 66% in 2008 down to 64.1% in 2011, hardly bodes well for an economy that supposedly pulled itself out of a recession in June 2009.
Labor Force Participation Rate 1990-2011
While there were certainly challenges as the Labor Force Participation Rate fell after 2000, it was back on the rise before plummeting in 2009 through 2011.

In the following graphs we drill down on employment changes from 2008-2011 for various age groups, ranging from 16-24 to 65 and over. Pay particularly close attention to the net change column on the right, especially the Unemployment Rates and the Labor Force Participation Rates.

Ages 16 to 24

From 2008 through 2011, the Civilian Noninstitutional Population grew by 714,000 while the Civilian Labor Force contracted by 1,035,000 resulting in 1,749,000 million people being sidelined or added into the ‘Not in the Labor Force’ portion of the Civilian Noninstitutional Population (Civilian Noninstitutional Population = those not in the Labor Force and those in the Labor Force). While some of those in this youngest employment cohort opted to go to school (as typically happens when the economy deteriorates), the unemployment rate hike of 4.5% from 12.8% in 2008 to 17.3% in 2011 highlights the gravity of the problem. On a brighter note, the unemployment rate dropped 1.1% from 2010 to 2011.

Ages 16-24 Employment Work-up
While some of those in this youngest employment cohort opted to go to school (as typically happens when the economy deteriorates), the unemployment rate hike of 4.5% from 12.8% in 2008 to 17.3% in 2011 highlights the gravity of the problem. On a brighter note, the unemployment rate dropped 1.1% from 2010 to 2011.

Ages 25 to 54

From 2008 through 2011, the Civilian Noninstitutional Population declined by 948,000 as the baby-boomers (born 1946 through 1964) continued moving into the 55 and over grouping. While the pain of the deterioration in the Employment Picture runs throughout the various age groups, it is in the 25 through 54 segment which are really the prime earning years and are reflected in the very high Labor Force Participation Rate. The problem of course is that this portion of the population was affected the most by the economic collapse. In 2011, this segment (124,704,000) comprised 52% of the Civilian Noninstitutional Population (239,618,000), but accounted for 59% of the unemployed (8,069,000 of the 13,747,000 total unemployed).

Ages 25-54 Employment Work-up
In 2011, this segment (124,704,000) comprised 52% of the Civilian Noninstitutional Population (239,618,000), but accounted for 59% of the unemployed (8,069,000 of the 13,747,000 total unemployed).

Ages 55 and over

From 2008 through 2011, the baby-boomers (born 1946 through 1964) rolled into this age group, expanding it by 8.5%, from 70,652,000 in 2008 to 76,716,000 in 2011, a 6,064,000 increase. While the younger age groups experienced massive deterioration in terms of the Labor Force, Employment, Unemployment Rate, and the Labor Force Participation Rate, the 55 and older segment showed remarkable improvements in all of those categories.

Ages 55 and Over Employment Work-up
The growing 55 and over group (thanks to the baby-boomers 1946-'64) defied conventional wisdom by actually increasing the Labor Force Participation Rate from 39.4% in 2008 to 40.2% in 2011. The questions are many...why are they not retiring? Are they continuing to work out of desire or necessity?

Again, in the following tables we include data reflecting narrower age groupings for the employment picture so that you can see where you fit into the scheme of things. We will leave the exploring up to you, but it is remarkable to note that the 65 and over was the only segment to experience a rising Labor Force Participation Rate. Seniors are rejoining (or never leaving) the working ranks. This might be due to the economic hardship, the desire to continue working, pension shortfalls, etc. We will be addressing the pension issue very soon. There are many more observations, but we’ll leave it at that.

Be sure to scroll down to the bottom for some final words on how a recovery will look.

Ages 25-34 Employment Work-up
For the 25-34 Age Group, 392,000 entered the Labor Force (net) from 2008-2011 while 1.4 million were added to the population segment for a Labor Force Participation Rate of 28.6%...this of course has driven down the overall LFPR significantly.
Ages 35-44 Employment Work-up
The 35-44 Year Old age group also experienced a significant decline in the Labor Force Participation Rate.
Ages 45-54 Employment Work-up
Ages 55-64 Employment Work-up
Ages 65 and Over Employment Work-up
The 65 and older set are going back to work in droves (or remaining in the workplace). There are a variety of reasons for their rising Labor Force Participation Rate, including pension shortfalls, insufficient incomes, desire to remain productive...this trend will likely continue as the baby-boomers continue to expand the ranks of 65 and over group.

Tale of the Tape…Reagan – Obama

A quick look back at challenging times for two presidential administrations.

Reagan 2nd Term 1985-1988 Unemployment LFPR
Reagan rolled into office on the heels of an inflation frenzied economy with rates approaching 15% and a restrictive monetary policy that drove mortgage rates above 18%. Obama, of course, came into an economy racked by high unemployment and a collapsed financial system. The question is, how did each respond?

Both Reagan and Obama were beset with economic challenges in their respective administrations. Under Reagan’s watch, from 1985 through 1988, the Unemployment Rate went from 7% to 5.3% and the Labor Force Participation Rate went from 64.8% to 65.9%.

Reagan v Obama Unemployment and LFPR
It can be argued at least in part that Reagan's economic success in his second term ist attributed at least to a focus on tax cuts and deregulation.

Road to Recovery by March 2015, or wishful thinking?

  • 6.0% Unemployment
  • 66.0% Labor Force Participation Rate
  • Employed increasing 12.9 million
  • Unemployed falling by 2.9 million
  • Labor Force expanding by 10 million

A hopeful(?) scenario…assuming the following:

  • Civilian Noninstitutional Population expands by 200,000 per month
  • Unemployment Rate falls by 0.06% per month
  • Labor Force Participation Rate improves by 0.057% per month
Road to Recovery-Perhaps
The idea here is to drive the economy back to the 66% Labor Force Participation Rate and 6% U-3 Unemployment Rate. The policies required and government actions to effectuate this are open for debate. Let's hope for a V-Shaped recovery...it's tough to tell from this chart that the US has been out of recession since June 2009
Ages 16 and Over 2012-2015
It's necessary to understand how high the mountain to recovery really is (for it to occur by March 2015)...e.g., Employment would have to rise by 12.9 Million (350 per month); Unemployment would have to fall by 70,000+ per month.

The likelihood of a U.S. economy recovery as depicted above really depends on the extent that we aggressively pursue policies aimed at growing the GDP at a more rapid pace, focusing on economic expansion and fostering a more competitive economic environment. We will be posting articles relating to the American Economic Vision going forward very soon.