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August 12, 2005

Highly Questionable US Employment Gains!
by Marc Faber

Popular opinion has it that businessmen tend to be dishonest, lawyers liars, religious people "good", the army honorable with a high standard of conduct and morals, and that government represent the people.

I do agree that some businessmen (that is most of them) are not particularly honest and that lawyers need to twist the truth in order to get some of their guilty clients off the hook. We also know by now that the conduct of the military - irrespective whether it is made up by a bunch of terrorists or West Point graduates - is anything but honorable. What still needs to be badly deflated is the faith people have in government - in particular the faith of investors in the accuracy of the statistics published by the government agencies needs to be badly shaken. In fact, I am a believer that governments from China to the US will endlessly twist statistics around to suit their political agenda and worst of all, the public then buys them.

I have a friend in the US, Bill King (billking@ramkingsec.com), who is an accomplished statistician and publishes a remarkable daily commentary for institutional investors on US the economy and the capital market. Bill King, with whom I recently had the pleasure to dine in Chicago, does not take figures published by the US government at face value, but analyses the details of the economic indicators in great details. As an example he took, in early July, a closer look at the June employment figures, which showed that in June 146,000 non farm payroll had been created by the US economy. The first point he noted was that by itself the 146,000 job creation was a disappointment since 200,000 jobs had been expected. In addition, this was the third consecutive disappointing non-farm payroll number. According to King, the Bureau of Labor Statistics (BLS), "Net Business Birth/Death Model" created 184,000 FICTIONAL jobs (pls see tables at the end of this report). These are fictional jobs jobs, which no one counts but are assumed by the BLS to have been created by small businesses (this practice of the BLS creating fictional jobs was introduced in 1996 under the assumption that employees who were laid off by large companies would start their own businesses and would go unnoticed by the BLS). Also, what hardly anyone talked about was that, in June alone, the manufacturing sector lost 24,000 jobs, which was the fourth consecutive month of manufacturing job losses.

Bill also notes that since August 2004, 96,000 manufacturing were lost. Bill King also writes that the categories, ex-construction, where jobs were created, had lower income in June than in May. Leading job creation categories include: Construction 18,000, Professional and Business Services 56,000, Education and Health Services 38,000 and Leisure and Hospitality 19,000.

Moreover, according to King, "Leisure & Hospitality once again provided most (81,000) of the BLS's Birth /Death fictitious jobs. These jobs, according to the BLS, earn $9.10/hr or $235.16/week. This is less than the $236.08 that was earned in May. An income decline also occurred in retail, another category that produces a large amount of jobs. Retail workers earned $12.32/hr in June or $379.46/week versus $380.99 in May."

King then lists some additional earning declines in sectors which were producing jobs: "Professional & Business service earnings fell to $610.47/week from May's $621.69. Education & Health Service income fell to $537.84/week from $541.19. Financial Service income fell to $636.51/week from $656.64.

In addition, the BLS report highlights the problem of the US economy. High paying jobs are being lost while low paying jobs are added. So, while leisure and hospitality jobs, for which employment growth is strong, earn about $ 240 per week, manufacturing jobs, which are being lost, earned $669/week, a multiple of income versus the jobs being created ex-construction.

Bill King then quotes Merrill Lynch's chief economist, David Rosenberg, who noted that, "in terms of which industries are the hottest, look no further than the housing market, which directly and indirectly added more than 40k to last month's employment tally or about 1 in every 4 jobs created. In other words, this would have been yet another tepid near-100k nonfarm report without the housing bubble that the Fed is trying desperately to deflate. What then picks up the slack once the housing market turns from sizzle to fizzle? Well, look no further than these other segments of the economy that were primarily responsible for the job gains we saw last month: restaurants, amusement parks, gambling casinos, administration/waste services, membership organizations, government and warehousing/storage, which were responsible collectively for one-half of the overall job growth posted in June.... Average weekly wages for most workers rose in June by $1.01 to $541.22. This followed a 59-cent decline in May, the department reported, after revising its earlier figures. After taking into account the impact of inflation, wages for production and nonmanagerial workers, who account for 80 percent of the workforce, were 0.6 percent lower in May than a year earlier."

It should also be noted that according to a research paper by the Federal Reserve bank of Boston, unemployment is far higher (around 8%) than what the US government's statistics show.

I have pointed out before that the US economic expansion is not driven by capital spending, industrial production and employment gains but purely by appreciating real estate prices, which allow households to extract money form their homes by increasing and refinancing their mortgages. I think the above statistics which show declining real incomes and a deterioration in the quality of employment, in as far as high paying jobs are replaced by low paying jobs, confirm this view. In addition, one sector where employment is growing strongly and in in which weekly earnings are high, is construction. In June the construction sector added 18,000 jobs and weekly earnings rose according to Bill King from $751.16 in May to 757.37 in June. But, since construction jobs are related to the greatest housing bubble in modern history, one can only imagine what will happen to these relatively well paying jobs when the housing bubble bursts....

I am always critical of analysts, but sometimes someone does really in depth and detailed analysis and sheds light on the lies that governments spread in order to make things appear rosy. Bill King King (billking@ramkingsec.com), is one of these remarkable people who, a few days ago also took the CPI apart and showed that inflation could not possibly be as low as the government contends. What it means if the CPI is indeed higher than what the government suggests is that real GDP (nominal GDP growth less inflation rate) is hardly growing....

Regards,

Marc Faber
GloomBoomDoom.com

Dr Marc Faber is editor of the Gloom Boom & Doom Report and the author of "Tomorrows Gold".

Dr Faber is a contrarian. To be a good contrarian, you need to know what you are contrary about. It helps to be a world class economic historian, to have been a trader and managing director of Drexel Burnham Lambert when the firm was the junk bond king of Wall Street, to have lived in Hong Kong for a quarter of a century, and to have a contact book crammed with the home numbers of many of the movers and shakers in the financial world.

Famous for his approach to investing, Marc Faber does not run with the bulls or bait the bears but steers his own course through the maelstrom of international finance markets. In 1987 he warned his clients to cash out before Black Monday on Wall Street. He made them handsome profits by forecasting the burst in the Japanese Bubble in 1990. He correctly predicted the collapse in US gaming stocks in 1993; and he foresaw the Asia-Pacific financial crisis of 1997/98 and the resulting global volatility.

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