Lies, Damned Lies, and Jobs Data
“There are three kinds of lies: lies, damned lies, and statistics.” The great American humorist Mark Twain popularized that quote more than a century ago.
Journalists are fond of citing Twain’s witty observation about statistics and why not? It’s true. The financial press, in particular, tends to spread smooth-sounding narratives that are actually based on statistical baloney.
Today, I want to focus on U.S. employment data, which is widely touted as one of the economy’s greatest strengths. “Low” unemployment has served as a pillar for the long-running bull market, but the numbers aren’t as sturdy as they appear. If this pillar gets knocked down, stocks are likely to follow suit.
The Bureau of Labor Statistics (BLS) reported last Friday that total nonfarm payroll employment rose by 128,000 in October, with the unemployment rate slightly edging up to 3.6%. That’s the lowest level since 1969, when Richard Nixon was president. The current occupant of the White House, Donald Trump, immediately tweeted:
“Wow, a blowout JOBS number just out, adjusted for revisions and the General Motors strike, 303,000. This is far greater than expectations. USA ROCKS!”
Stocks soared that day, with the S&P 500 and NASDAQ hitting new highs, largely based on knee-jerk euphoria over the jobs data. Wall Street closed the week on a strong note (see table).
When pressed by reporters, the White House later explained how it arrived at a figure of 303,000 new jobs instead of the reported 128,000. The administration boosted the original employment number with 60,000 jobs that officials claimed were lost to the now-resolved General Motors (NYSE: GM) strike. Then they arbitrarily added jobs adjustments from previous months, although they didn’t subtract any downward adjustments from earlier months. For good measure, they tossed in 20,000 temporarily hired Census workers who are no longer working.
Maybe I’m too cynical, but this “creative accounting” seems dubious. As Mr. Twain said: lies, damned lies, and statistics.
In fairness, both Democrats and Republicans are guilty of spinning data in their favor. Regardless of which party is in power, remain wary of government propaganda. It can cloud your investment judgment.
Peeking under the hood…
I don’t want to get too wonkish here, but when exaggerated jobs data have the power to significantly move markets, you should know what’s really behind the numbers. Let’s “lift the hood” and examine the calculations used to determine the unemployment rate.
You might be surprised to discover what the BLS defines as an employed person. Here are the official government criteria:
- All those who did any work for pay or profit during the survey reference week.
- All those who did at least 15 hours of unpaid work in a business or farm operated by a family member with whom they live.
- All those who were temporarily absent from their regular jobs, whether or not they were paid for the time off.
In other words, if you technically have a job, you are considered “employed” regardless of whether you worked a single hour during a surveyed week. That means underemployment, in which people need or want more hours, is not a factor.
But the worst discrepancy appears in the labor participation rate. In January 2000, the labor force participation rate was 67.3%. In April 2019 (latest available statistics), the labor force participation rate was 62.8% (see chart).
According to BLS data, this decrease in the labor participation rate means that 5.5 million people left the labor force over the past 19 years and never came back. In addition, employment growth has not kept pace with population growth.
The upshot: the employment picture isn’t as good as it looks. Also consider the fact that 43% of U.S. households can’t afford the basics to live, meaning they aren’t earning enough to cover the combined costs of housing, food, child care, health care, transportation and a cellphone, according to a recent study by the research group United Way.
Many journalists are lazy and don’t dig for the truth. It’s how investors get conned into popping the Champagne over a “blowout” jobs report that’s actually pretty weak.
Which brings me to the trade war. Supposed progress on the trade war usually turns out to be an illusion.
In pre-market futures trading this morning, the three main U.S. stock indices were poised to open higher on optimism that a trade deal was imminent. But ever since the trade war started in January 2018, neither Washington nor Beijing have followed through on everything they’ve promised. In fact, officials on both sides have often ignored past statements and quickly reversed themselves. Your shrewdest course of action? Treat trade negotiations as background noise.
The ticking debt bomb…
The financial media act as cheerleaders for the stock market: “Rah-rah Wall Street!” But the Ken and Barbie dolls on CNBC often ignore unpleasant realities, such as the corporate debt bomb.
Since the financial crisis of 2008, when the Federal Reserve pushed its target interest rate to a record-low 0.25%, markets have been awash with cheap money. Corporate America went on a borrowing binge.
Government debt is at dangerous levels, too. The Treasury Department reported last Thursday that the federal government’s total outstanding public debt has surpassed $23 trillion for the first time in history. The debt has grown 16% since Trump’s inauguration. The budget deficit for 2019 came in at $984 billion and is projected to grow in coming years.
When the federal budget deficit is high (as it is now), a large quantity of bonds must be sold to finance the deficit, which in turn compels the government to offer higher rates of interest to sell enough bonds.
The interest rate on Treasury bonds is the single most important rate of interest, so as rates on bonds get higher, the result is higher borrowing rates for consumers and businesses. As borrowing costs increase to pay for the deficit, it could trigger a wave of corporate bankruptcies and global financial contagion. This debt bomb is largely ignored by the media, but it could explode when the economy contracts.
The consensus among analysts is that a recession is likely to occur within 12-18 months. As an insurance policy, Fed Chair Jerome Powell announced another interest rate cut last week, but that could tie the hands of the U.S. central bank in the future.
The Fed is trying to perform a balancing act between an apparently healthy economy and the looming threat of recession. However, U.S. budget deficits are massive, interest rates already are low, and the Fed’s balance sheet is bloated. It’s increasingly doubtful that U.S. policymakers will have sufficient tools to deal with the downturn when it finally hits.
How to invest your money now…
I’ve cast a spotlight on the stealthy trends that endanger your portfolio, because even in this post-truth world, facts still matter.
So where should investors turn?
One especially resilient investment trend is the fast-growing marijuana industry. The legalization of pot represents a once-in-a-lifetime opportunity. Imagine if you had been able to invest in liquor and beer companies, just as Prohibition was ending in the early 1930s. You would have made your family rich, for generations.
The legalization of marijuana has turned a lot of investors into millionaires. But the pot boom has burned a lot of unsuspecting investors, too.
You need to wade through the exaggerated claims to pinpoint the pot stocks with long-term staying power. That means digging beneath the surface, to examine balance sheets, operating results, and competitive positioning.
The good news is, the experts at Investing Daily have already done the homework for you. We’ve put together a special presentation to steer you toward the best marijuana investments now. Click here to get started.
The exploding popularity of medical and recreational marijuana is one of the most lucrative trends you can find today. Even better, the cannabis bonanza is largely resistant to economic cycles, trade policy and “cooked” government data.
John Persinos is the managing editor of Investing Daily. He also serves as editor-in-chief of Marijuana Investing Daily. You can reach John at: firstname.lastname@example.org