Sunday, October 5, 2014


New York — Like teachers who turn poor test scores for students into high letter grades using subjective adjustments, government bureaucrats who issued Friday’s September jobs report created hollow arguments for political partisans and for surface-level financial analysts that the American economy is rebounding.

When the report came out Friday morning, with a headline that the U.S. jobless rate fell below 6 percent for the first time in six years, government interventionists cheered, broader stock market indices soared, and many pundits applauded what seemed to be long-awaited and welcome success.

Yet, the overwhelming majority inside our country knows better — after-tax incomes are falling, living costs are rising and the bottom 80 percent of American households are eating into meager financial reserves to live during this difficult year, rather than saving for retirement.

What do the latest unemployment report and other relevant economic data really tell us about President Obama’s economic policies and their implications for investors?

Experts know that the most important assumption used in calculating unemployment estimates is the “labor force participation rate” — the percentage of adult civilians who are actively engaged in the workforce. The Bureau of Labor Statistics maintains excellent online historical records that track annual trends in the labor force participation rate from 1947 through 2013. (You can see the numbers at https://www.bls.gov/cps/cpsaat01.htm.)

Between 1997 and 2001, this key ratio peaked at 67.1 percent of the population; by 2008, the ratio dropped to 66.0 percent; however, by 2013, the ratio plummeted to 63.2 percent.

For 2013, using a 66.0 percent labor force participation rate instead of the 63.2 percent rate means that unemployment may have been 11.2 percent instead of 7.4 percent.

For September 2014, using the same 66.0 percent participation rate, unemployment would have been 10.6 percent instead of 5.9 percent reported by the Labor Department and hailed by Mr. Obama.

No ringing endorsement

Rather than a ringing political endorsement for the president’s antimarket government initiatives, perhaps recent stock price increases may actually have occurred because professional investors concluded the American job and income pictures remain weak.

The U.S. jobs report moves capital markets worldwide — for years, sophisticated investors have watched this development to discern the course of U.S. growth, which serves as engine for the global economy.

Thinking more specifically, experienced analysts and money managers understand that the most important facet of economic growth is the trend in the number of private-sector jobs and the aggregate incomes these generate to fund purchases of goods and services and to boost the stock of savings.

Before January 2009, when the Federal Reserve System began suppressing benchmark interest rates and governments worldwide boosted spending levels to reignite economic growth, persistent decreases in the unemployment ratio were greeted as good news — signs that private-sector incomes, consumer demand and additions to savings would grow robustly.

However, in 2014, persistent declines in unemployment rates, after almost six years of extraordinary monetary easing and fiscal stimulus, should actually heighten investor anxieties. A tightening labor market here would mean that our central bank could reverse policies even sooner that have kept key interest rates at historically low levels.

Increasing interest rates would then cool consumer spending while also removing artificial support for values many of assets, including stocks, bonds, and real estate.

Perversely since 2008, good news on employment and incomes is actually bad news for investors, and vice versa.

Across this country, Americans know we are in trouble, even after all the extraordinary measures taken by politicians and central bankers who claim we are better off.

When it comes to making economic progress, the truth is simple: Spend less than you earn each year, then invest the excess amount of savings to achieve your financial goals.

Well before the Nov. 4 midterm elections, look for a flood of more detailed company reports to overwhelm the flimsy case presented Friday that Team Obama can bring enough high-paying private sector jobs into communities so that America achieves a broad-based and lasting economic recovery.

Charles Ortel serves as managing director of Newport Value Partners (NewportValue.com), which provides economic research to executives and to investment firms.

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