The Cruel Reality Masked by America’s Official Statistics

Twelve months ago, the Federal Reserve launched its third QE programme, dubbed “QE Infinity”. In American Football parlance, this “Hail Mary” was the last desperate attempt to create jobs and stimulate growth. A year later and things have apparently improved to such an extent that the Federal Open Markets Committee (FOMC) is on the verge of tapering its $85billion a month bond purchasing programme.

According to the official nonfarm payrolls’ reports, the number of jobs has been increasing at a steady rate and unemployment has been falling. Above all, financial assets (stocks!) have been soaring. Since the stock market is all that seemingly matters in terms of modern wealth creation, it is quite clear to any observer of the economy that the financial crisis is well behind us and the recovery is in full swing.  

Yet the reality is not so simple. As we’ve often said at Spreadbet Magazine, monetary easing has had a wildly distortive effect on financial markets. Even though we are concerned about the long term impact of these policies, if the Fed withdraws its support too quickly, this could have an extremely detrimental impact on asset prices. And this is not all. There are also problems with the economic data itself.

Unfortunately for central planners, what you see clearly isn’t what you get when it comes to the economic reality behind the official numbers. Mainstream aggregate indicators do not always capture the reality they intend to as they are often managed to achieve the “best” results. This has been the case with CPI for a long time. Over the years, the CPI calculation has been tweaked dozens of times, not to reflect a real basket of purchased goods and services, but to give the lowest reading. In addition to this, many indicators, like nonfarm payrolls, GDP, consumer spending, and others, are based on estimates. Bernanke is all too aware of this and this could explain why he has been so hesitant to reduce QE Infinity. Were this not the case, how else do you explain the current aggressive QE campaign and Zero Interest Rate Policy, when the economy hasn’t officially been in recession?

To get an idea of how the US economy has genuinely fared in the last twelve months, we have collected together some interesting indicators. Let’s look at them:

·   Nonfarm payrolls grew at an average pace of 183,000 per month during the last 12 months. That’s better than not growing at all, but is still below the 200,000 threshold, which economists believe represents a healthy job market.

·   The unemployment rate declined from 7.8pc to 7.3pc during the same period. This is a small improvement and the underlying rate is still well above the 5.0pc figure America was at, coming into the Credit Crisis at the end of 2007. If this pace continues, it will take years before the labour market fully recovers.

·   While official employment numbers have shown some improvement, there are alternative measures, which shed a different light on what is happening out there. U6 is an alternative measure for unemployment, which takes into account all those marginally attached to the work force and those involuntarily employed part-time (who were seeking full-time employment without success). U6 declined from 14.7pc to 13.7pc during the last 12 months, but it is still almost double the unemployment rate and well above the 8.8pc level recorded at the end of 2007.

·   GDP grew at 0.1pc, 1.1pc, and 2.5pc for the latest three quarters, ending 2Q13. In the context of “accommodative” Fed monetary policy, we consider these GDP growth figures as disappointing.

·   An alternative method for analysing GDP is to calculate it using “chained dollars”. Using chained dollars of 2009, GDP grew from $13,152 billion in 2Q03 to $15,681 in 2Q13. That corresponds to a real growth rate of 1.8% per year (CAGR).

Even though the official numbers show sluggish to mild economic expansion, the alternative measures point to a more troubling reality.  The following table contains data from the Supplemental Nutrition Assistance Program (SNAP) since 1969;

SNAP provides Americans, who live below the poverty line, with foodstamps. Between the 1960s and 1980s, there was a massive rise in the participation rate. By 1992, the annual cost of the SNAP programme stabilised at about $20billion, until 2003. Over the next 4 years, this suddenly rose by 50% and in 2007 reached $30billion a year.  However this was nothing compared to what has happened since.

As the US economy ran into trouble the number of individuals relying on foodstamps doubled and the cost of the programme shot up to $74.6billion a year. This tells us two important things, at odds with the version of reality the Fed would have us believe. First jobs are increasingly difficult to get. Second, real consumer income is decreasing, as a result of lower wages, higher prices or a combination of the two.

The latest SNAP report shows numbers for June. This shows that 83% of SNAP households have gross income at or below the poverty line. Worse still, a total of 61% have gross income at or below 25% under the poverty line. The number of households receiving foodstamps rose 45,900 in one month to a total of 23,117,000, a record high. In total (in terms of individuals, not households) there are 47,760,000 Americans using SNAP, which corresponds to 15% of the whole population!

While official figures state that the job market needs to improve by 2.2 million jobs to recover to pre-crisis levels, the foodstamps program needs to shed 20 million individuals to achieve the same goal.

This is staggering when you think about it.