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Investing & Day Trading Education:  Day Trading Academy

Government Economic Reports Misleading and Unreliable

Part 1 Unemployment

Office Workers

Office Workers

As any day trader of stocks, currencies, commodities and other investment opportunities will tell you reports and statistics from the government of the United States will definitely have an impact on your trading for the day.

Investors and traders are used to hearing about the unreliable information coming from a number of countries (Argentina for example). International organizations are increasingly seen suspect as well as they are reluctant to cause trouble with influential countries around the world.

A newer phenomenon has been the inaccurate and misleading statistics coming from the United States government as more and more information needs to fit the political ambitions of those responsible to lead the government of the United States.

Accurate up to date information is paramount to any trader or investor. When you can no longer trust the government to provide you with correct information one begins to lose faith in the economic system.

This also leads to even more volatility in the markets and even more decisions being made on the psychological beliefs of the traders and investors.

Determinations are being made with incomplete and inaccurate information which leads to distortions and misapplication of resources in the economy at large. Put simply it is bad for business in the short and long term.

We will be taking a look at this development over the next few months but suffice to say that it increasingly important for investors and traders to be able to “read between the lines” in order to make sense of what direction the economy is moving in with these market indicators.

This article will focus on the official unemployment rate in the United States known as the U-3 rate. If one is to give any credence to this government report during the last quarter of 2013 the unemployment rate has been moving downward in the low 7 % percentile.

According to the government bureaucrats during the first quarter of 2014 it is due to stay below 7% for the first time since the 2008 financial implosion. This milestone was actually achieved in December of this past year (6.7%) and in January 2014 (6.6%) but there always seems to be a revision that may change the final figures somewhat.

It was already during the Reagan administration that it was decided to change who was to be counted as officially unemployed. People who had not looked for a job in the last two weeks would be dropped as well as the decision that teenagers newly unemployed would not be counted either.

It was reported during the 2012 election cycle that the Census Bureau manipulation of the unemployment numbers showed an obvious example of making the statistics more favorable to the incumbent administration.

Many individuals in finance,banking, and investing were taken aback at the clumsiness of this effort. How widespread this supposed effort was remains unseen but this kind of activity effects the entire economy because decisions the Federal Reserve makes based on U-3 numbers.

There was a rumored similar problem in 2010. Of course, this has taken on a political agenda where each side wants to either deny or exploit the problem even further than the facts may merit. Suffice to say that the very idea that the numbers are being manipulated is having a detrimental effect on the business and investment community.

The reported drop in October 2012 before the election was from 8.1% to 7.8%. This would have been if stated correctly a 4 year low. Many analysts at the time had actually expected an increase from 8.1% to 8.2%.

The unemployment rate U-3 can easily be manipulated based on what the government decides is the actual labor force.

According to a number of experts who base their figures on actual labor participation if the unemployment rate is calculated to the measurements that were in effect during the G.W. Bush years the unemployment rate would be at least 2% points higher bringing U-3 close to 10%. This level of unemployment would be politically untenable to those in power and therefore will not be permitted at this time.

The U-6 rate is a more accurate picture of the employment picture. This combines the unemployed with the underemployed. The underemployment situation is an increasingly difficult problem exacerbated by the Affordable Health Care legislation which provides a perverse incentive for companies to keep more employees as part time so they are not legally required to provide increasingly expensive government mandated health care.

The U-6 rate can easily add an additional 7% to the unemployment rate. Now you have rates close to 15%.

The next group of the unemployed one needs to look at is discouraged workers. These are individuals that are not even considered any longer since they are not actively seeking employment. If there is a significant improvement in the job market many of these people will re-enter the labor pool once again. This will keep official unemployment figures stubbornly high as the economic picture improves.

Although this group is hard to calculate accurately because they are not as a whole counted. Once you include the discouraged worker you can add 1 to 2 % to the unemployment rate. Now you have rates that are fluctuating in the high teens. Keep in mind the average rate of unemployment during the Great Depression was 25%.

Unemployment Lines 1931

Unemployment Lines 1931

 

Is it no wonder why many Americans don’t quite believe official government figures? They know what is going on in their own lives. A more accurate picture for the investor and trader would be the labor participation rate. This official rate stood at 62.8% in December of 2013. If discouraged workers came back into the job market this figure would increase by at least 1%.

To give one some parameters for a comparison the lowest labor participation rate recorded during the administration of G.W. Bush was 65.7% in January of 2009 at the very end of his term. So if you would calculate the labor participation rate that existed during the Bush years with those out of work today unemployment (U-3) would be at 14%.

Note that does not include the underemployed and the discouraged workers. If you include them you are approaching 20% unemployment which would be 1 in 5 of the potential work force.

The official decline in unemployment this past December to 6.7% touted by the government as good news is only possible because 374, 000 additional workers dropped out of the labor force.

Labor participation is now back down to 1978 levels last seen during the Carter administration. The labor participation rate has declined every year of the Obama Presidency.

Labor Participation

Labor Participation

 

This article does not prescribe to any political motivation. One can easily point out that labor participation rates during the Clinton years (1993-2001) at times exceeded 67%.

The actual objective of this article is to encourage the investor to fully investigate what the true economic picture is outside the opinions of the politicians and journalists who no longer can be trusted to be neutral. As we move forward, one must be less inclined to take government statistics on face value but must do further research to fully understand what is going on with the economy.

 

 

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