Last Friday, a Bloomberg.com headline read: �U.S. Stocks Gain, Treasuries Drop as
Unemployment Rate Declines.�
Let�s have a look at the reported decline in the rate of
unemployment. Do you believe that the U.S. auto industry added 28,000 jobs in
July amidst the GM
bankruptcy, sell-off and close-down of GM auto divisions, and demise of GM
suppliers? No? Well, that�s what the Bureau of Labor Statistics (BLS) reported.
The 28,000 new jobs were created by �seasonal adjustments.� July is a month when jobs are
automatically added by the BLS to seasonally smooth the layoffs of autoworkers
during July�s retooling for the new model year. This year, most of the
retooling did not occur, yet the annual seasonal adjustments did. Adjustments
are also made for supporting industries, which are partially idled while auto
production halts for retooling.
More phantom jobs were created by the �Birth-Death Model.� The payroll jobs data
contains guesses about the numbers of new startup company hires and jobs lost
from business failures. Failed businesses don�t report the lost jobs (deaths),
and new jobs from startups (births) are not captured in the reporting. The
government estimates these numbers, but the estimates are based mainly on
growth periods, not on recessionary times. Consequently, during economic
downturns, the Birth-Death Model overestimates the number of new startup jobs
and underestimates the job loss.
The employment outlook was further improved by pushing
another cadre of workers, who have been unemployed for too long, off the
unemployment rolls. Remember that, since the Clinton administration, the long-term discouraged (people
out of work for more than one year) are not counted as being in the workforce.
The length of the current downturn means that short-term discouraged workers,
who are counted among the unemployed, are now moving into the long-term discouraged
category, which simply erases their existence and lowers the measured rate of
All sorts of distortions can find their way into the
official statistics. For example, industrial production estimates are based on
electricity consumption. Unusually hot weather, which causes a jump in air
conditioning use, appears in the statistics as an increase in industrial
output. Cool weather spells during summer reduces electricity use and results
in a phantom drop in industrial output.
Nominal retail sales figures can increase from an uptick in
An increase in real gross domestic product can be the result
of underestimating inflation.
Other distortions come from the year-to-year comparisons. As
time passes, new comparisons are no longer with previous peaks, but with more
recent lows. Thus, reported declines are less severe than previously, which
makes things sound better when they aren�t.
By spinning the financial news, the appearance of recovery
is created, and this lures people back into the stock and real estate markets
where they can lose the remainder of their wealth.
Craig Roberts [email
him] was Assistant Secretary of the Treasury during President
Reagan�s first term. He was Associate Editor of the Wall Street Journal. He has
held numerous academic appointments, including the William E. Simon Chair,
Center for Strategic and International Studies, Georgetown University,
and Senior Research Fellow, Hoover Institution, Stanford University. He was
awarded the Legion of Honor by French President Francois Mitterrand. He is the
author of Supply-Side
Revolution : An Insider�s Account of Policymaking in Washington; Alienation
and the Soviet Economy and Meltdown:
Inside the Soviet Economy, and is the co-author with Lawrence M.
Stratton of The
Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the
Constitution in the Name of Justice. Click here for
Peter Brimelow�s Forbes Magazine interview with Roberts about the recent
epidemic of prosecutorial misconduct.