Gauging The Gauges (Part Three)

As in any new year there comes a time when one must decide where, or why, one is going to proceed in any direction. Which was the underlying premise for writing this series. (links to: Part One or Part Two)

It’s one thing to set off on a course. It’s quite fool-headed to assume any gauge never needs to be adjusted or reset as to provide true readings. Assuming anything heralded across the media landscape is accurate without your own due diligence may cost you more than you bargained for.

There is probably no better example for this than the recent scientific expedition that were convinced they would find and record evidence of dwindling ice in the Antarctic.  All based on their beliefs, reasoning, and thinking, fortified by their models and gauges.

So sure and trusting of those gauges, they charted a vessel and set course for the Pole to record the devastation. Problem? So much ice – so thick, not only did their ship become ice-bound, the ice breaker sent to rescue them became stranded!

All appearances suggests someone never checked to verify if their gauge for ice being present was accurate or not. Even in this day of satellite technology – no one bothered to verify? If scientists can be so foolish, you think economists can’t fall into the same group think? (Please spare me the climate hate mail)

Just look at probably one of the foremost indicators or gauges used by everyone across the media as well as the so-called “smart crowd.” The unemployment number. (UE#)

All of the sudden I noticed media outlets changing their interpretation of the UE# in unison. Seemingly it has morphed overnight from one of the most accurate barometers for economic activity to suddenly a “questionable gauge.” Why?

Well of course, or as usual, pure politics. And this is where all the earlier playing, or spinning as its know to be can now actually work against the very people who need clarity more than ever. The unemployed themselves.

The UE# has always been gamed no matter who has been in office. However, since the financial crisis of 2008 that game has never been “played” as it seems of late. The evidence for that is how long UE emergency insurance payments have been going on. We are now approaching 5 years of benefit extensions. (I’m not stating for, or against. I’m just arguing perspective and possible impact, nothing more.)

The reason this number is far more important today in 2014 than previously is two-fold. First: The Federal Reserve policy of tapering their quantitative easing policy  has been tested. They actually began tapering. One must remember one of the foremost criteria for that decision was the UE#’s which recently printed 7%. The lowest since the crisis.

The dreaded idea of tapering was seen by nearly all of the financial media as well as Wall Street itself as “highly unlikely.” In my opinion, “unlikely” can no longer be viewed in the same paradigm. Which changes everything the markets have relied upon as an “accurate gauge” for what will happen next policy wise.

On the political side a new budget was signed into law the other day. What was noticeably absent? Further emergency unemployment payments effecting nearly 1.5 Million people immediately. i.e., No further benefits or payments.

What affect this will have on the psyche of the public at large is anyone’s guess for this 1.5 million persons are the first to lose immediate help. I remind you there are millions upon millions coming along that have been receiving benefits that will face this same dilemma.

Is a 7% UE# today the equivalent of a 7% job market say only 6 years ago? What happens to the businesses where these people live? Their landlords, grocers, city government, et al – when suddenly millions of people are suddenly found with ZERO income? And the issue doesn’t stop there.

Both sides of the political aisle have and still are using the current UE# as a gauge on whether or not emergency benefits should go on. Problem for both including everyone else is most haven’t a clue of how, or what that number truly represents any longer.

If people are now dropped abruptly from the roles of counted UE, the rate can actually fall even lower showing a seemingly better number. (e.g. 6.9% or lower)  And what does that do for policy calculations not only in Congress, but at the Federal Reserve? For if the Fed. changes anything in policy direction either way, Wall Street or the financial market as a whole can react in ways no gauge may have predicted.

I’ve been stressing the following example for years now. It seems both the political as well as the media are finally coming around to understanding what they’ve been willfully ignoring, along with its implications.

  • “Let’s say there are 1000 jobs with 1 person in each. If you lay off 100 people you would have an unemployment rate of 10%. If at the next report the companies that laid off those 100 workers now state those workers are not going to be rehired because – those jobs will no longer be available; (i.e.,Whether by attrition or a shuttering) You will now have a base line of 900 jobs for the next report. So by the Government’s calculation and reporting criteria the next unemployment report would show a 0% rate meaning 100% or full employment because the pool of available jobs is now smaller (meaning 900 instead of 1000) and they are all currently filled.”

For the 100 people who lost their job this type of math is what infuriates them, and with good reason.

Over the last 5 years this earlier gauge of economic health has been adulterated with years of chronically unemployed falling from the roles never before seen since the depression years. Yet, the number itself still holds monetary decision-making hostage as to implementing or discontinuing policies as if it were infallible or incorruptible.

Gauging what numbers, or what to do with those numbers, is a requisite for clear thinking. However, knowing if your gauges are reading correctly?
That’s a paramount requisite for an entrepreneur.

© 2014 Mark St.Cyr