Mish's Global Economic Trend Analysis

Unemployment Rates at Various Demographic Labor Pool Growth Rates
Ponzi Financing in Poway California Based on Massively Rising Property Values
Reader Questions: Who is "Not in Labor Force"? Who is Counted as Unemployed?
Crash in Spanish 2-Year Bond Yield; Monti Calls for More Crisis-Fighting Urgency; No Structural Problems Fixed

Unemployment Rates at Various Demographic Labor Pool Growth Rates

Posted: 06 Aug 2012 10:49 PM PDT

Fed chairman Ben Bernanke estimated it takes about 125,000 jobs per month to keep up with birthrate and immigration. I think because of boomer retirements, the number is much lower, say 75,000 jobs a month.

However, there has been almost no increase in the labor pool for the past four years as noted in Reader Questions: Who is "Not in Labor Force"? Who is Counted as Unemployed?

Civilian Labor Force

Notice how the labor force did not skip a beat in prior recessions. The housing bust and boomer demographics changed the trend in a dramatic way.

Civilian Labor Force Since 2000

Labor Force Barely Increased in Nearly Four Years

The labor force peaked at 154,875,000 in October of 2008, exactly on the cusp of the great recession.

The current labor force is 155,013,0000 barely above what it was nearly four years ago.

At 75,000 per month since October 2008, the labor force should have risen by 3,450,000 not 138,000. The result is a huge unwarranted drop in the stated unemployment rate.

Labor Pool Math

click on chart for sharper image

The above chart is courtesy of my friend Tim Wallace. I asked for a chart that shows what the unemployment rate would look like at various demographic labor pool growth rates, starting January 1, 2008.

The chart is not seasonally adjusted. It compares July 2012 to the same month in prior years.

At 100,000 per month, the unemployment rate would be over 11%. The unemployment rate would be even higher if Ben Bernanke was correct. If my estimate of 75,000 per month was correct, the unemployment rate would be about 10.5%.

At a meager 25,000 per month growth rate, the unemployment rate would be over 9.0%.

The only reason the unemployment rate is artificially low because in the last year alone In the last year, those "not" in the labor force rose by a staggering 2,027,000.

Some of that is "forced retirement", a term I coined to describe those who want a job and need a job but retired because there are no jobs and they expired all of their unemployment benefits.

Another reason for the shrinking labor pool is disability fraud, a subject I have written about numerous times.

Self-Employment

Moreover, please note that 100% of U.S. Jobs Added Since 2010 Have Been Self-Employment, Contractor, or Other Jobs Without Unemployment Insurance Benefits

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Ponzi Financing in Poway California Based on Massively Rising Property Values

Posted: 06 Aug 2012 07:53 PM PDT

Poway California, population 47,811 as of 2010, has placed an enormous bet on rising home prices and tax revenues. Poway borrowed $105 million but will not start to pay that amount back until 2033 at which time they will owe $877 million in interest.

Clearly this would be fiscal insanity anywhere, but it is especially true in California given Proposition 13 that caps property taxes.

The Voice of San Diego reports Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools

Last year the Poway Unified School District made a deal: It borrowed $105 million from investors to fund a final push in its decade-long effort to revamp aging schools.

Without increasing taxes, the district couldn't afford to borrow money in the conventional way. So, instead of borrowing from investors over 20 or 30 years and paying the debt down each year, like a mortgage, the district got creative.

With advice from an Orange County financial consultant, the district borrowed the money over 40 years in a controversial loan called a capital appreciation bond. The key point for the district: It won't make any payments on the debt for 20 years.

And that means the district's debt will keep getting bigger and bigger as interest on the loan piles up.

As well as being expensive, capital appreciation bonds work by tapping future growth in property values to pay today's debts, a concept considered by many in the school bond business to be both risky and inequitable. In 1994, the state of Michigan banned school districts from issuing bonds like this, deeming them too toxic to taxpayers.

Nevertheless, California's ever-strapped districts have increasingly looked to capital appreciation bonds to raise money for improvements without increasing taxes on current residents. Across the state, districts have borrowed billions this way, using exotic financing to shift the burden for paying for today's school construction to future generations of Californians.

"This is way worse than loan sharking," said Michael Turnipseed, executive director of the Kern County Taxpayers Association in central California, which has lobbied the state Legislature to tighten laws on school district borrowing. "And Poway is the poster child. What they have done is absolutely insane."

Last year, the district put together its deal to borrow $105 million, without paying anything towards the debt for 20 years.

In two decades' time, taxpayers will start paying about $50 million a year towards the loan. They'll make those payments for the next 20 years or so.

It's a bit like a massive version of one of those exotic loans that got homeowners into so much trouble.

With one key difference: For the next 20 years, Poway Unified isn't even paying the interest.

Essential Math

Think growth will bail out Poway? Think again.

From Poway City Data the population of Poway shrank by .5% between 2000 and 2010.

The current upfront cost of this $1 billion proposal would be $2196 per every man, woman, and child.

By the time Poway starts paying the bill, the cost will be $20,916 per every man, woman, and child.

Given the average household size is 2.9, the cost per household when the debt is due will be $60,656.

Beyond Insanity

This scheme is not insane, it's well beyond insane. Unfortunately, I cannot come up with a stronger word to describe it.

Bear in mind that 20 years from now it is highly likely the school district will need still more money for school maintenance. What then? Will property taxes rise 10-fold to pay back this loan?

I do not think that would happen even without Proposition 13 caps.

Forget about 20 years from now, Poway Unified residents are still waiting for the renovations they had been promised back in 2002. Cost overruns ate up the last bond effort already.

Not having learned anything, the district approached voters a second time in 2008, and voters approved on the promise of no property tax hikes.

Until when?
How?

This jackass deal was done with advice from an Orange County financial consultant. Can we have a name please?

I want to know what was in this deal for him, if anything. And if there is something, I want to see this person brought up on criminal charges. If there was nothing in it for the consultant, then he is just another stupid idiot who thinks property tax revenues will skyrocket enough to pay for this mess.

I assure you they won't. I also assure you this deal will bankrupt Poway.

It will not take 20 years to find out either. 10 years from now (or less) with property values stagnant, and the district likely needing still more money, it will be all over for Poway.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Reader Questions: Who is "Not in Labor Force"? Who is Counted as Unemployed?

Posted: 06 Aug 2012 11:29 AM PDT

Reader Denise wants to know precise definition of who is not in the labor force. That's easy enough. The answer is found straight from the list of BLS frequently asked questions.

Who is not in the labor force?

Labor force measures are based on the civilian noninstitutional population 16 years old and over. (Excluded are persons under 16 years of age, all persons confined to institutions such as nursing homes and prisons, and persons on active duty in the Armed Forces.) The labor force is made up of the employed and the unemployed.

The remainder — those who have no job and are not looking for one — are counted as "not in the labor force." Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force.

"Looking for a Job" is Key to Understanding Reported Unemployment Number

The BLS description seems logical enough except it ignores those who want a job but did not look in the past four weeks.

BLS questions (shown below) will root those people right out of the labor force.

That raises another question about what constitutes looking for a job. Reading the want-ads in the newspaper or even doing online searches does not qualify as "looking for a job".

Applying for a job online constitutes looking for a job, so does going on an interview, and so does sending out a resume.

Who is Counted as Unemployed?

Here is the BLS description of Who is Counted as Unemployed?

Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. Actively looking for work may consist of any of the following activities:

Contacting:

An employer directly or having a job interview

A public or private employment agency

Friends or relatives

A school or university employment center

Sending out resumes or filling out applications

Placing or answering advertisements

Checking union or professional registers

Some other means of active job search

Passive methods of job search do not have the potential to result in a job offer and therefore do not qualify as active job search methods. Examples of passive methods include attending a job training program or course, or merely reading about job openings that are posted in newspapers or on the Internet.
Workers expecting to be recalled from temporary layoff are counted as unemployed, whether or not they have engaged in a specific jobseeking activity. In all other cases, the individual must have been engaged in at least one active job search activity in the 4 weeks preceding the interview and be available for work (except for temporary illness).
The questions used in the interviews are carefully designed to elicit the most accurate picture of each person's labor force activities. Some of the major questions that determine employment status are: (The capitalized words are emphasized when read by the interviewers.)

Does anyone in this household have a business or a farm?

LAST WEEK, did you do ANY work for (either) pay (or profit)?
If the answer to question 1 is "yes" and the answer to question 2 is "no," the next question is:

LAST WEEK, did you do any unpaid work in the family business or farm?
For those who reply "no" to both questions 2 and 3, the next key questions used to determine employment status are:

LAST WEEK, (in addition to the business,) did you have a job, either full or part time? Include any job from which you were temporarily absent.

LAST WEEK, were you on layoff from a job?

What was the main reason you were absent from work LAST WEEK?
For those who respond "yes" to question 5 about being on layoff, the following questions are asked:

Has your employer given you a date to return to work?
and, if "no,"

Have you been given any indication that you will be recalled to work within the next 6 months?
If the responses to either question 7 or 8 indicate that the person expects to be recalled from layoff, he or she is counted as unemployed. For those who were reported as having no job or business from which they were absent or on layoff, the next question is:

Have you been doing anything to find work during the last 4 weeks?
For those who say "yes," the next question is:

What are all of the things you have done to find work during the last 4 weeks?
If an active method of looking for work, such as those listed at the beginning of this section, is mentioned, the following question is asked:

LAST WEEK, could you have started a job if one had been offered?
If there is no reason, except temporary illness, that the person could not take a job, he or she is considered to be not only looking but also available for work and is counted as unemployed.

Civilian Labor Force

Chart from St. Louis Fed.

Notice how the labor force did not skip a beat in prior recessions. The housing bust and boomer demographics changed the trend in a dramatic way.

If you are not familiar with "Fred" the St. Louis Fed data website, type in some terms and see what you can find. In particular, Denise and others may be interested in the Participation Rate, the ratio of those in the labor force to the civilian noninstitutional population.

Civilian Labor Force Since 2000

Labor Force Barely Increased in Nearly Four Years

The labor force peaked at 154,875,000 in October of 2008, exactly on the cusp of the great recession.

The current labor force is 155,013,0000 barely above what it was nearly four years ago.

This dynamic cannot be attributed to boomer retirement alone. Bernanke believes the labor force should be growing at about 125,000 a month. I think the number is closer to 75,000 a month because of boomer retirements.

Regardless, the number should not be zero or near-zero.

At 75,000 per month since October 2008, the labor force should have risen by 3,450,000 not 138,000. The result is a huge unwarranted drop in the stated unemployment rate. I will have more on this idea in a subsequent post.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Crash in Spanish 2-Year Bond Yield; Monti Calls for More Crisis-Fighting Urgency; No Structural Problems Fixed

Posted: 06 Aug 2012 08:17 AM PDT

Yield on 10-year Spanish bonds remains stubbornly high near 7%, but yield on 2-year bonds is in the midst of a breathtaking crash.

click on any chart for sharper image

Spain 10-Year Government Bond Yield

Spain 2-Year Government Bond Yield

Of the two charts, the second is far more important. Spain will be rolling over short-term bonds, not 10-year notes.

As dramatic as that move in the 2-year yield has been, please note that German 2-year bonds yield a negative .05%.

Germany 2-Year Government Bond Yield

Monti Calls for More Crisis-Fighting Urgency

Bloomberg reports Monti Calls for More Crisis-Fighting Urgency in ECB Standoff

Italy's Prime Minister Mario Monti warned of a potential breakup of Europe without greater urgency in efforts to lower government borrowing costs, as a standoff over European Central Bank help for Italy and Spain hardened.

Monti, in an interview with Germany's Der Spiegel magazine published yesterday, said that disagreements within the 17- nation euro area are detracting from the policy response to the debt crisis and undermining the future of the European Union.

Spain and Italy, whose surging borrowing costs have shunted them to the heart of the turmoil in the euro area, are resisting pressure from ECB President Mario Draghi to formally request aid in return for strict conditions before the central bank will buy their bonds. Monti and Spanish Prime Minister Mariano Rajoy have both said they will await further details as the ECB works up its plan. The German government said for the first time today that Chancellor Angela Merkel supports Draghi's proposals.

French President Francois Hollande is pushing Monti and Rajoy to request aid from Europe's bailout fund to help ease markets and protect France from speculation, Italian newspaper la Repubblica reported, without citing anyone.

Italy Hung Out to Dry

"Italy has, to all intents and purposes, been hung out to dry," Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., said in an e-mailed comment. "As far as Rome is concerned any external assistance would be the kiss of death. This puts Mr. Monti in an untenable situation."

Draghi Misunderstood

Spanish Economy Minister Luis de Guindos told ABC newspaper at the weekend that his country awaits details of the ECB's bond-buying proposals before deciding whether to request aid. Both Italian Bank of Italy Governor Ignazio Visco and Minister for Economic Development Corrado Passera said in separate newspaper interviews that the country doesn't need a bailout.

Visco told La Repubblica that markets had initially misunderstood Draghi's comments.

"Not only did the ECB not take any steps backward, but it took decisive steps forward to correct the functioning of monetary policy transmission, and therefore of the stability of the single currency," he told the newspaper.

Sigh of Relief

For now, the markets are breathing a sigh of relief over lower yields in Spain. Draghi will likely wait now before announcing his plan, assuming he really has a plan other than to buy more time.

I suspect a key part of his plan is to hope he can placate the markets until the German constitution court gives a blessing on the ESM. The court rules on September 12.

Until then, Draghi has every reason to be purposely vague about what he will or will not do. Much will depend on the wording of the ruling. In the meantime, as we have seen previously, a month is a long time in Europe.

No Structural Problems Fixed

The market is cheering now, but no structural problems have been fixed. There has been no work rule reform in Spain, Italy, or Greece. Indeed, France has taken a major step in the wrong direction with president Francois Hollande's proposal to make it impossible to fire workers.

Taxes have gone up across the board in struggling countries, certainly the wrong approach with the unemployment rate in Spain near 25%.

In simple terms, policy moves have been ass-backwards. Good luck with that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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