Gold Gets a Growth Scare
An emotional, jubilant hooray! could be heard earlier this month when the Bureau of Labor Statistics (BLS) released its latest jobs numbers for January 2012, showing the addition of 243,000 net new jobs. That’s the kind of news both the financial markets and the political complex were yearning for, because it implies that growth is finally greater than the rate at which new workers enter the labor force due to US population growth alone.
But the report was not without controversy. Significant revisions to BLS sampling were introduced in this report as a result of the recent integration of the 2010 census data. Recalibrated, this altered the size of the workforce, and thus changed the number of Americans either working, looking for work, or dropped out of the workforce altogether. And so the cries of Foul! began.
Those who see politics in the numbers are perhaps overreaching. Likewise, those who see the dawn of a new era of resumed job growth are also likely premature in their celebration.
The fact remains that the United States is still at the beginning of a long journey in clearing the vast tranche of structural unemployment, sadly left in the wake of the Great Recession. A weak dollar, an emerging megatrend towards exports, and attractive business conditions should combine to enable the United States to slowly, eventually pull itself out of its current economic sinkhole.
But accurately identifying the true strength of any US recovery will be crucial, as certain portions of the economy emerge from the rubble of the past few years while other sectors languish. It’s notable, for example, that after a decade-long bear market, technology stocks and the Nasdaq 100 may now be indicating that a more sustainable recovery lies ahead. For those of us who monitor the resource scarcity story, we know that technology will not fundamentally alter actual natural limits. But on the other hand, we need to be mindful that technology still offers the promise of mitigating our resource dilemma, helping from the margin as we move through a rough energy transition.
In the wake of the jobs report, US Treasuries and gold, the two asset classes that have offered safety through the past few years, faltered. Right or wrong, global markets were jolted by what’s commonly called a "growth scare."
The question at this juncture is how durable is such a scare as this? Does this portend a major shift in our familiar, decadal trends? Or is it just a blip, as the Great Stagnation lumbers onward?
And what will be the implication for the future price of gold?
Jobs Data Kerfuffle
The US employment data series that I have long favored is not the unemployment rate or non-farm payrolls, but simply the raw number of all those currently employed in the system. While other series are important, the Total US Employment figure has probably given the best, undiluted read on the US jobs situation.
Yes, it’s true that over the past year, government jobs have been lost while private payrolls have risen. Such trends cause many analysts to currently favor the Non-Farm Payrolls series. Also, with so many discouraged workers, the series on the Participation Rate is also important. Nevertheless, much of the contentious dispute that arose after the jobs report centered on that Total US Employment figure, as well as the big gap that opened up between the seasonally adjusted (SA) version and the non-seasonally adjusted (NSA) version.
Let’s take a look at each:
In the above chart of Total US Employment, you can see that a workforce recovery has been gathering steam for the past year. But with the January Jobs Report, employment soared by over 847,000 jobs from 140.790 to 141.637 million employed. That's a big jump and the biggest monthly gain since the 2008 trough of 138 million.
Now let’s look at the same data series, non-seasonally adjusted (NSA):
Whoa, what’s this? In the non-seasonally adjusted (NSA) data, January actually saw total employment in the US fall by 737,000 jobs, from 140.681 to 139.944 million employed. That huge gap of nearly 1.6 million workers between the SA and the NSA data was due to the recent BLS statistical revisions and the source of the resulting disputes.
But a few comments on this issue. One, there is always a gap between the seasonally adjusted and non-adjusted time series. Eventually the conformity between the two is ironed out. Second, despite the broad scope of this series, it does not tell us the actual nature of the jobs Americans are taking. Are they full-time or part-time jobs? What supporting data can we glean from tax receipts?
Unfortunately, and unsurprisingly, the US economy is indeed adding jobs, but these are not high paying jobs, nor are they overwhelmingly full-time jobs. This is very much in accordance with the type of recovery the US economy is seeing: the permanent loss of high paying jobs in finance, advertising, and consumption, and a transition to jobs in mining, farming, and natural resource exports.
It’s also important to remind ourselves that, compared to the past ten years, the annual averages of total employed in both 2010 and 2011 -- which have been heralded as "recovery years" -- are still far below pre-recession peaks. 2007 saw 146.05 million of total average employment, while 2011 saw an average 139.87 million. So even the strong appearance of recovery in the monthly series needs to be tempered by the big picture: The US not only has to put the long-term unemployed back to work, it has to create enough new jobs to cover population growth, too. So far, that's just not happening.
The New American Jobs Mix: Part-Time Work
While it’s true that the post-2008 recovery has seen a rebound in state, local, and federal tax receipts, these trends have not exactly been robust.
Again, there’s no need to argue whether the post-2008 recovery has been weak. Just about everyone now, including the perennial optimists, agree that this was neither a typical post-war recession nor a typical post-war recovery. What remains in dispute, however, is whether normalcy can ever be fully reestablished.
I would say no.
And I would say that's not necessarily a bad thing. If the great symbiosis (hat tip: Don Coxe), in which endless American consumption of foreign goods was recycled back into our Treasury market, was sustainable, then it would still be in effect. But alas, it was not the fate of the US to claim ownership of all of the world’s full-time, highest paying jobs. Eventually the ability of the developing world to also obtain math, science, and engineering education has revealed itself. Now Americans face a more competitive world with fewer embedded advantages.
Let’s take a look at the actual mix of full-time vs. part-time jobs growth over the past five years:
America used to produce and maintain nearly five full-time jobs for every part-time job. But now that ratio has fallen nearly 15%, as part-time jobs outpace full-time job growth. This is ground zero of the weak economic recovery. Americans feel poorer because their wages are indeed lower, their benefit packages are shrinking or nonexistent, and their purchasing power is not keeping up with the rise in food, energy, and health care costs.
This structural change is reflected in Federal Tax Receipts, as reported by the US Treasury. Like the recovery itself, (withheld) receipts emerged from the lows of 2009, but are flattening once again:
The Fed’s Outlook on Jobs
Among the important shifts in policy and procedure announced in the latest Fed meeting was a renewed emphasis on jobs. And Chairman Bernanke has been explicit, in the wake of this most recent jubilant jobs report, that the US recovery has a long way to go:
Though the unemployment rate fell to 8.3 percent in January, many Americans have stopped looking for work and have therefore been pushed out of the workforce, perhaps permanently. The labor force participation rate fell in January to 63.7 percent -- its lowest level since January 1982. More than 40 percent of those currently unemployed have been without work for more than six months, Bernanke noted. That's roughly double the share during the housing boom of the early and mid-2000s, he said. That adds up to 5.5 million Americans who have been out of work for six months or more, not to mention three to five million more people who have dropped out of the labor force because they have given up looking for work. Bernanke has previously warned about the prolonged economic harm of long-term unemployment. In September the Fed chairman called long-term unemployment a "national crisis." "This has never happened in the post-war period in the United States," Bernanke said in September. "They are losing the skills they had, they are losing their connections, their attachment to the labor force." -- Ben Bernanke: Long-Term Unemployment Crisis Altering Job Market For the Worse.
A stubborn contingent refuses to believe that further quantitative easing (QE) from the Fed is either imminent or necessary. In an inversion of causality, some even believe that if the Fed were to withhold further QE, it would either confirm or, improbably, ensure that the "recovery” carried onward.
To believe such things, however, one would also have to believe that QE1 and QE2 did nothing stabilize the system. Likewise, that the European version of QE was also without effect. Well, the Fed as an institution no doubt suffers from extreme normalcy bias, but starting in early 2011, it clearly began to surrender its belief in a normal economic recovery. And you should, too. As the locus of contemporary economic thinking, the Fed had so much success over the decades with its stimulus policies that it would take the rough experience of 2007-2010 to break their faith with that view.
The Truer Picture of US Growth
We can think of the US now as a kind of corporate office park in which S&P 500 companies domestically maintain an executive presence only, while their operations hum along globally. A good portion of the US population has been swept aside over the past 40 years, as many jobs were lost to overseas workers, and then the 2008 crisis took out a whole additional layer of US workers when the bubble of finance, insurance, and real estate expired.
The good news is that the inflation in resources and commodities, an independent trend that started ten years ago, is providing some pricing power, and driving the growth of exports and also a fledgling renaissance in US manufacturing. As I detailed in The Price of Growth, however, this is merely the start of a long transition.
Much of the difficulty lies in precisely the issue highlighted by Fed chairman Bernanke: Much of the US workforce is wrongly skilled for the lurching, tectonic shifts that have befallen both the US and the global economy. We spent an unfortunate three decades preparing young people to play a role in what I will call the Surplus Wealth Economy: marketing, advertising, consumption, travel/leisure, and money management. These industries are fine, as industries go. But they require a continued organic growth in the “real economy.”
I recognize that such a concept, the real economy, continues to be derided as an outdated view, but I take the exact opposite position: I now think it's appropriately contrarian to suggest that domestic manufacturing is a must-have for the US economy, principally because we now know that with new technologies -- especially in greentech, from batteries to wind and solar power -- much of the latest innovation is coming from the manufacturing floor.
An articulate observer of the current US dilemma in this regard is technology investor and social theorist Peter Thiel. Correctly, Thiel has noted that the US continues to be a generator of innovation, but that progress itself has become scarcer. Innovation in the digital world continues, but there is a problem in the world of atoms -- the physical world. In his late 2011 essay, The End of the Future, Thiel notes the persistent belief on the part of the intelligentsia in progress and future growth that at the same time is blind to the data showing a decline in growth in real terms. As result, our top minds can delude themselves about the true state of progress.
He writes further:
Taken at face value, the economic numbers suggest that the notion of breathtaking and across-the-board progress is far from the mark. If one believes the economic data, then one must reject the optimism of the scientific establishment. Indeed, if one shares the widely held view that the U.S. government may have understated the true rate of inflation — perhaps by ignoring the runaway inflation in government itself, notably in education and health care (where much higher spending has yielded no improvement in the former and only modest improvement in the latter) — then one may be inclined to take gold prices seriously and conclude that real incomes have fared even worse than the official data indicate.
Thiel is one of the few commentators who have an interest in gold from a completely different view than is normally associated with those investing in the metal.
Indeed, this viewpoint is precisely the same one I addressed late last year, in Gold and Economic Decline, when I unpacked Paul Krugman’s view on gold as a play on stagnation. In subsequent essays, I have also cited the slowdown in the rate of productivity and other related data showing that progress has slowed. A complex system in deceleration is bullish for gold, simply because of the dearth of other investment opportunities.
I have followed Thiel’s work for years, and unsurprisingly, unlike the policy and economics establishment (which remains unjustifiably sanguine about issues related to oil depletion), Thiel -- along with other notable hedge fund managers -- was early to the Peak Oil story. Gold, like oil, remains very much at the center the intractable problem facing developed world economies.
What the Growth Scare Means for the Markets -- and Gold
The question is, does the growth scare provided by the recent jobs report hurt the investment prospects for gold?
As I mentioned, the technology sector is flashing the possibility that investment could finally be drawn back to that area, as capital has been starved for growth opportunities for several years now. I don’t think the growth prospects of the United States and the wider OECD -- Japan and Europe -- are really strong enough to trounce the stagnation thesis just yet.
However, in Part II: The Case for $2,500 Gold In 2012, I am more specific than I have previously been about the likely price bands for gold as we head further into 2012. We'll look at the impact of various economic scenarios on gold's price and determine which one is most probable and why.
Meanwhile, I also want to address what a large selloff in US Treasuries might do to both gold and the stock market. If global markets believe strongly enough in the Return to Growth theme, then global stock markets could be pushed high enough to trigger an exit of capital out of bonds. That would create conditions that the financial markets and gold have not had to contend with in some years. If gold has indeed received a growth scare, the same effect could well likely ripple through other asset markets, with surprising outcomes.
Click here to access Part II of this report (free executive summary; enrollment required for full access).