The True State of the Union

“Our businesses have created more than eight million new jobs since we hit bottom. America’s getting stronger and we’ve made progress.”-- President Barack Obama, Jan. 7, 2014

“Our businesses have created nearly twice as many jobs in this recovery as businesses had at the same point in the last recovery, when there was no Obamacare."-- President Obama, July 24, 2013

If the U.S. truly was in recovery mode, ask yourself:

Why is the president expected to discuss in his State of the Union address Tuesday night the need for extending jobless benefits, creating manufacturing centers, and more stimulus spending?All amidst the Federal Reserve’s money printing and its long five years of zero-interest rate policies, the wind beneath the wings of the stock market?

Reality Check

“Real median household income of $51,000 is 8% lower than in 2007. Almost four million people have been out of work for more than six months, three times the pre-recession average. One-third of black men aren’t even in the labor force, the highest mark since records began in 1972. And there are fewer people with jobs in the U.S. today than six years ago.”—Bloomberg, January 2014 (click here: http://www.bloomberg.com/news/2014-01-23/obama-can-t-shake-economy-s-downside-amid-signs-of-growth.html).

“The share of Americans either working or looking for work sank to 62.8% in December, tying October for the lowest level since 1977 – an era when women were much less likely to work. People have simply just given up looking for work.” – New York Times, Jan. 10, 2014 (see here: http://economix.blogs.nytimes.com/2014/01/10/debating-why-the-work-force-is-shrinking/)

“Had Obama's recovery been only as good as the average of the past 10 recoveries, the economy would be $1.3 trillion larger…And had job growth been just average, there'd be 7.3 million more people with jobs today. That means 64% of those now looking for work would be employed. The only things that have shown strong and steady growth under Obama are excuses.”– Investor’s Business Daily, November 2013 http://news.investors.com/ibd-editorials/110713-678405-obama-recovery-remains-worst-since-the-depression.htm

“Everybody gets so much information all day long they lose their common sense.”--Gertrude Stein

The president is expected to hammer away at income inequality in his upcoming State of the Union address Tuesday night, a distortion field around these ugly realities.

Because income inequality is the ugly stepchild of poor economic growth and job creation -- and the U.S. tax code is already codified envy, as one analyst noted.

Set aside the president’s expected, extended effort at blame deflection. From January 2009 to December 2013, the White House and Congress added $5.8 trillion to the federal deficit, according to the Office of Management and Budget and Congressional Budget Office.

Tepid 53,330 Jobs a Month

From January 2009 to December 2013, the U.S. economy added 3.2 million jobs, data from the Bureau of Labor Statistics show. There were 133.6 million people with jobs in January 2009. That grew to just 136.87 million as of December 2013. (click here http://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=CE_cesbref1).

That’s a tepid average of 53,330 jobs a month. That’s quite a “curb your enthusiasm” result. Even when you take out the 4.2 million jobs lost in 2009, the monthly average is still bad at just 158,146 jobs a month. That’s barely enough to break even when population growth is taken into account, and well below the average 288,000 per month in other recoveries dating back to World War II, according to analysis by the Joint Economic Committee.

This is likely why a recent Fox News poll shows 74% of those surveyed say the U.S. is still in recession.

The poll shows 32% of voters say they like both Obama and his policies. But that’s a fifteen percentage point drop from 47% who felt that way in October 2012. On top of that, 62% now say they dislike the president’s policies, up from 51% the month prior to his re-election. All of this is likely why the President’s approval rating is at a low 40%, says Gallup.

Nearly half of Fox respondents (49%) say the economy is the most important problem for Congress and the president to work on right now. When asked about the most important economic issue, the people Fox surveyed say jobs/unemployment (40%) and government spending (36%) are tops on their list. Income inequality comes in far behind at 12%.

The median household income of $51,000 for Americans is exactly what the Census Bureau reported for 2012, and in real dollars is down from a decade ago, turning into ho-hum retail sales for the holidays, up only around 3% versus a year ago.

Meanwhile, policy wonks are stuck in the weeds of debates about how not extending jobless benefits will cause higher taxpayer costs anyway, because those out-of-work people end up on food stamps or on Social Security disability checks.

Again, distractions from the more important discussion -- why isn’t the U.S. creating jobs? Is health reform an X-ray lead blanket on job growth?

Are DC politics still a check on the economic recovery? Or the lunatic complexity of the U.S. tax code and regulatory state, where the president consistently leaves the fine print to others?

Is the real crisis how we govern ourselves?

Through the Looking Glass

Meanwhile, economists are also dealing with a rabbit hole of government GDP revisions.

Starting last summer the U.S. delivered a Hollywood make-over to its economic growth rate. For the first time the U.S. put on its balance sheet the value of intellectual property for things like corporate research and development, books, music and Hollywood movies.

Initial estimates show the changes would add anywhere from $300 billion to $500 billion to U.S. GDP.

Prior to these changes, U.S. GDP growth averaged 2.4% from 2010 to 2012 (the growth rate slipped into the red in 2009, a negative 2.8%).

Overall growth in nominal U.S. GDP is trending at around 3%. That means corporations have little in the way of pricing power to make profits, which is why companies continue to send capital investment, and jobs, overseas.

The U.S. has truly become the land of low wages, low prices, and low interest rates. A low-rate policy that has banks extra-careful and restrictive with their lending.

Fed Forward Guidance

For now, the Federal Reserve’s reduction in bond purchases, or tapering, has put the focus on its forward guidance, its communications about its plans to eventually begin raising short-term interest rates which businesses can then use to plan for the future.

If what the U.S. central bank did in 1994 and in 2004 is any guide, expect incremental, slow, quarter-point rate hikes.

The Fed is in no rush to raise rates. Last December, the Fed said rates would stay near zero "well past" the time when the unemployment rate falls to 6.5%. While the unemployment target is “a non-binding indicator,” as one analyst noted recently, the jobs rate still factors mightily in Fed moves.

That means the U.S. government can continue to borrow at teaser rates — and any future rate hike would hit American taxpayers hard, because interest costs on all U.S. debt now came in at $415.7 billion last year.

What Jobs Data Does the Fed Look At?

Since central bankers have strapped future rate hikes to the jobless rate, the Fed’s forward guidance needs to be pristine clear on just what jobs data it is weighing.

That’s because the drop in the unemployment rate, now at 6.7%, is increasingly distorted by the decline in labor force participation. The jobless rate is falling because people are leaving the labor force, reducing the ranks of those counted as unemployed.

Is the Fed looking at the labor force participation rate? The quality of employment? The rise in the number of part-time workers? Cuts in the full-time hourly work week? The nature of joblessness, chronically long-term or just temporary?

The jobless rate of young adults, African Americans and other minorities? Joblessness among senior citizens and baby boomers? Age and skill levels of the unemployed?

Labor force participation rates are a significant problem. As of last September, labor force participation fell by 2.6 percentage points since the start of the 2007 recession, says James Sherk, senior policy analyst in labor economics at the Heritage Foundation. About 6 million fewer Americans are working or looking for work. Some of this decline is clearly related to the aging of the US population, yes, but the danger is the U.S. has stopped creating jobs.

Goldman Sachs warned last spring the problem of labor force dropouts is “clearly structural,” and that the labor force rate will continue to drop at an estimated 0.2 percentage points per year for the foreseeable future.

If the labor force participation rate were at 2009 levels, the jobless rate would be close to 11%, says business columnist James Pethokoukis. The Federal Reserve Act calls for 'maximum employment', not 'minimum unemployment,” Zero Hedge has noted.

Will the Fed Get Hit in the Head With Its Own Boomerang?

Fed rate policy and money printing is also fraught with inflation dangers, even though the U.S. is stuck in a disinflationary stage of the economic cycle. The jobless rate is backward looking, there’s a six-month lag to it, which Fed officials are aware of as they attempt to shut off the central bank’s liquidity hydrants.

Helping put a lid on inflation, too, is poor wage growth, and cheaper natural gas. Bank of America/Merrill Lynch estimates the U.S. paid just $76 billion for natural gas in 2012, $140 billion less than in 2008, a bigger savings gain than the payroll tax cuts of 2011.

Slippery Guidance

Going forward, plan for the Fed’s forward guidance on rates to be just as slippery as the European Central Bank’s recent communications, notes Satyajit Das, a former banker and author of Extreme Money and Traders Guns & Money, in the Financial Times recently.

On July 4, 2013, European Central Bank President Mario Draghi said key ECB rates would remain “at present or lower levels for an extended period of time.”

Then five days later, on July 9, ECB board member Joerg Asmussen chimed in: “[The period] is not six months, it’s not 12, it goes beyond.”

“Then the ECB immediately issued a statement saying Mr Asmussen did not intend to give guidance on the exact length of time for which the ECB expects to keep rates at record lows,” Day wrote.