Saturday, February 12, 2011

Société Générale's Albert Edwards (And Goldman Sachs) On "The Biggest Scandal Of The Last Decade": Plunging Labor Force Participation (Feb. 12, 2011)

From ZeroHedge:
Seven months ago, when the horrendous August 6 NFP print set the stage for Jan Hatzius to lower his outlook for the economy (and all the other sellside lemmings to follow suit), resulting in the announcement of QE2 three weeks later at Woods Hole by our dangerous monetary Dr. Moreau (not our definition: Sean Corrigan's - more on that later), we dubbed an article titled "Real U-3 Unemployment Rate When Adjusted For Labor Force Participation: Around 14%" in which we warned that the unemployment rate presented for public consumption is really one big lie.

Fast forward to today, when we now read that the topic of labor force participation, and specifically the massive plunge therein, is now seen by one of the brightest  strategist minds, that of SocGen's Albert Edwards, as "one of the scandals of the last decade." We thoroughly agree. In fact, we are certain that the labor force participation rate is the greatest scam the government is attempting to pull in order to create the impression that QE is working. The threat of this issue being comprehended by the broader population is finally so big that it necessitated Goldman Sachs' Sven Jari Stehn to come out with yet another extremely humiliating apologist piece of drivel, explaining how the labor force participation rate is really not at all concerning and that one should welcome the fact that less people are in the "labor pool", as a percentage of the total population, than at any time in the last 26 years. Nothing could be further from the truth, and in fact it underscores Bernanke's latest Catch 22 - the "lower" the unemployment (U3) rate is, the worse the economy is, as more and more workers get terminally disenchanted with their labor prospects, thereby validating just how ugly the truth behind the scenes truly is.
Here is what Zero Hedge said on August 6, 2010:
Running these numbers through the actual unemplyment calculation, reveals the following: while assuming a declining LFP rate we obviously get the 9.5% unemployment rate, assuming a peak 67.1% LFP results in a 13.0% unemployment rate. And if the labor force participation rate were to grow according to trendline, the jobless rate in the US today would have been reported at 14.7%, just about where the U-6 was reported, but based on an entirely different methodology.
We even charted this for those whose strong suit is visual learning...

...Keep in mind, that as the participation rate plunged since August, this chart looks far uglier now, and the real unemployment rate assuming trendline growth of the population and the labor force participation, is easily north of 15%.

We are delighted to discover that once again we were more than half a year ahead of the curve in spotting this latest attempt at gross manipulation of popular sentiment vis-a-vis some imaginary improvement in the unemployment rate.
So now that the stage has been set in this latest fight of discovering the truth between the forces of pragmatic skepticism and vile central planning propaganda, here is how Albert Edwards sees this topic.
One of the scandals of the last decade is the decline in US labour force participation. Yet despite this “reserve army of the unemployed” holding down wage and price inflation, there is likely to be a cyclical upward shock on core CPI. Given the market’s current worries about the inflationary impact of QE, prepare for a major market over-reaction.
It wouldn't be an Edwards piece without the recount of some self-deprecating anecdote. Well, age is as good as any:
At a macro client lunch recently, it was fear of sharply rising inflation and bond yields that topped investor concerns for de-railing the equity bull market. The discussion of inflation was very interesting but I felt very, very old when one of our guests related that his parents remembered 15% inflation! Hang on, I can remember 15% inflation. In fact, I can remember 25% inflation! Am I really now that old? My mind was transported back a decade when I was in a pub with a work colleague chatting to the barmaid who was a student at the local university. I already felt old when I discovered she had never heard of The Beatles, but on the way out of the pub she told my colleague that "your dad's a real rocker?!" That week I shaved off my moustache to shave 10 years off my appearance. What to do now? Well at almost 50 and newly-wed, I am more than content to become a historic relic and talk about my personal experience of double-digit inflation.

At about the same time I was being mistaken for my colleague's father, US labour force participation was peaking at 67% of the working age population (see chart below). Then, it had been rising continuously since the early 1960s, but the savage decline seen since is symptomatic of the post bubble, Ice Age adjustment and has profound implications....


Jan. 3