For months, even years, the market has been trying to figure out when the Federal Reserve will start to raise interest rates. The question of ‘When?’ has been the subject of countless articles, reports, and debates. But perhaps the world has been asking the wrong question; when the Fed raises rates matters much less than what happens when they finally do. The market is likely to perceive the decision to raise rates as a sign that the economy is healthy and ready to lose the training wheels that the Fed has kept it on for the better part of 7 years. What the market doesn’t realize is that they’re not just taking off the training wheels; they’re taking the economy off of life support. Low rates are the only thing keeping this economy afloat, and keeping them lower even longer only exacerbates the problem that we’re dealing with. Many economists see the Fed as the savior during a time of crisis yet ignore their implicit role in causing it. While there’s countless statistics and data that contradict the Fed’s insistence that the economy is gaining its footing, I’m choosing to focus on the labor market in this post since it’s one of the clearest signs that we’re headed for disaster.
There’s a great deal of data that can be found regarding the labor market and with that data comes some statistics that are rather useful and others that are particularly misleading. Let’s take the unemployment rate, for example, which recently fell to 5.3% in June from 5.5% in May (BLS, 2015). At first glance it seems like a sizable improvement in the labor market, but a deeper understanding of how this figure is calculated shows that the economy is losing traction. Ponder this: to be considered unemployed, you must have looked for work within the past 4 weeks, yet people who have given up looking are no longer counted as unemployed. As more people give up looking for work the unemployment rate falls, making a bad situation look like a positive one, and as it turns out, that’s exactly what’s happening. According to the Bureau of Labor Statistics, the Labor Force Participation Rate fell to 62.6% last month, the lowest it’s been since 1977 (BLS, 2015). The participation rate includes those working and looking for work, meaning that the aforementioned group of people who quit looking for work are no longer part of the labor force. If you consider the U-6 unemployment rate, which takes into account those who have given up looking for work and those working part time but would prefer full time work, you’ll see it stands at 10.3% (BLS, 2015). Misleading is an understatement when it comes to how the government reports conditions.
Many economists will claim that the Labor Force Participation Rate has fallen due to the retirement of many baby-boomers, but I’d argue that the opposite is true. Many baby-boomers have come back into the labor force and taken jobs that are typically held by younger workers, teenagers in particular. If you don’t live under a rock, you might have noticed many older people working the registers that younger people used to work at many fast food and retail stores. But in the case that you happen to be as unaware as many economists, consider the following statistics: the unemployment rate among teenagers age 16-20 is over 18% while those 65 and older have an unemployment rate of 3.7% (BLS, 2015). One might make the argument that this lower unemployment rate is flawed because the participation rate for those 65 and older is much lower than the rest of the population. In the interest of precision, we should look at the historical participation rate among those 65 and older to see what’s really going on. In 1990, the LFPR for those 65 and older was 12.1% and today it stands at 23.8% which means that during a time where many baby-boomers should be retiring, they’re actually working again (Kromer & Howard, 2013). It would appear that many award winning economists are more delusional than many people would come to believe.
Another statistic that seems rather promising, but once again proves to be misleading, is the rise in Total Non-Farm Payrolls. According to The Bureau of Labor Statistics, the economy added 223,000 jobs in June, higher than most estimates. But where did those jobs come from, and what types of jobs were they? The sectors that added the most jobs were Professional & Business Services, Retail, and Food Services & Drinking places while Manufacturing, Mining, and Construction all showed negative or no growth (BLS, 2015). The only jobs we created were service sector jobs. What we need are manufacturing jobs, and because of unnecessary regulations and taxes, we continue to lose our productive capacity. The persistent U.S. trade deficit is evidence of this.
“The Employment Situation – June 2015.” BLS New Release (2015): 1-38. 2 July 2015. Web. 4 July 2015.
Kromer, Braedyn, and David Howard. “Labor Force Participation and Work Status of People Years and Older.” (2013): 1-6. Census.gov. U.S. Census Bureau, Jan. 2013. Web. 4 July 2015.