The GDP numbers that came out this week had a surreal feel to them. We earnestly tried to square the report with the monthly numbers we pick up off of the Fed’s database.  One supposes that this is the sensation a forensic accountant gets when his antennae are picking up incongruities, those little hints that a financial statement deserves greater scrutiny.

The Wall Street Journal couldn’t contain itself. There was talk of champagne, popping corks, the old swagger and all that. When we looked at Total Loans and Leases originating from commercial banks, we had to wonder, if the economy was snapping back so vigorously, where, pray tell, was the lending activity? You wouldn’t know it by looking at this chart.

Prying a little deeper, we looked at the Civilian Employment/Total Population ratio. They like to keep this one out of the papers for obvious reasons. It almost looks like we’ve regressed back to the 1970s.

Which ought to be unsettling, because it suggests to us that the bail-out of the financial system has implanted another dysfunction deep within the cogs of the system and this dysfunction will not easily resolve.

As the clever minds at Agora Financial have put into a visual, this time is structurally different. The downturn has aspects that are more suggestive of a true depression than a recession that will gracefully bloom into a recovery.

We thought we’d drill down into some long term employment patterns and see if the numbers might allow us to place a frame of long term understanding around the present malaise.

The first bit of pernicious bunkum we’d like to dispense with is the assertion that the problem is a steadily increasing parasitic body of government employees who are slowly eating the brain of the American free market system. Unfortunately for the flat earthers and moon landing deniers of the economic  sphere, this is absolutely not the case.

We took the entire datastream from 1939 and divided it by total employment, you know, that slick operation of normalizing by a denominator. Sneaky, eh? No. We’re not being devoured by Gummit people. After an initial climb in the 1950s as the modern federal apparatus became standard procedure, we’ve been drifting between about 17% to 19% of the workforce, with the historical peak in about 1977. We’re in the same place we were in 1966 and 1993.

Somebody please call Mythbusters on this overblown crock of hooey. Of course, the Anarcho-Syndicalists among you may prefer no government employees at all.

So who’s been hiring all these industrious people? The construction industry? We can definitely see the long drawn out boom beginning in 1991 and pretty much peaking out in the summer of 2006. Interestingly it seems that the USA has a natural maximum of about 5.75% of the labor force employed in construction and it is currently near the low end of the range, where it may be finding a natural bottom.

So what about the financial sector? Is it true, are we becoming a financial economy, slowly but surely? Not according to this data. We were progressively, perhaps unnoticeably, becoming financialized between 1944 and 1984, a true gradual transformation of the economy, but then the financial sector stabilized and has held steady from 1984 until the present.

An interesting wrinkle, however, is that powerful computers and information technology may have greatly increased the per capita productivity of the financial workforce in ways that couldn’t apply to the construction workforce. So the financial sector could get much hotter while holding employment at 6%. That humble 6% of the population was empowered to take increasing risks with larger pools of capital, which, ummm… didn’t work out quite as planned. Perhaps the problem was that there was too much reliance on computation and not enough human judgment.

The real eye opener comes with the leisure and hospitality sector. We see a remarkably steady increase from about 6% of the workforce in the 1940s to 10% of the workforce today. This clearly tracks two factors; we have become steadily a more mobile nation and we have become steadily a more entertained nation.

Since this incongruously includes both business travel and vacation destinations it is hard to say how much is productive activity and how much is goofing off. Regardless, this clearly shows a nation of an almost fidgety energy. How long will this persist? As we slowly become decrepit and are overtaken b y China, we’d expect this value to begin trending down.

Last, and by far not the least is the strange hybrid category of educational and medical employees. This is probably the most significant trend that shows us the texture of our future.

It has been strongly climbing since 1944 and has been vaulting upwards as of late. From a low of 4%, it has soared to 15% and represents roughly 15% of GDP.  This has been one of the core themes driving this country for a long time and is bound to expand to 20% of the workforce within a decade. Wow. Americans obviously have long demanded the best healthcare. This is no new trend that the population lit on out of the blue. This is a general sense of entitlement that has been expanding steadily since WW II concluded.

What do we conclude from all of this? The real sources of social change will be coming from the aging population. The theme that we are being overwhelmed by a government bureaucracy is a canard, perhaps politically expedient or emotionally satisfying on some level, but fundamentally untrue. One concern is that if we enter a prolonged period of economic quiescence, the hospitality industry with its 10% of the workforce may take a significant hit.

2010, the year than began with a whimper and may leave with a bang.

First up, Iceland’s parliament, known as the Althing, has announced that it will make good on deposit guarantees…. quotes from their ministry of finance below:

“Yesterday evening the Icelandic parliament Althingi approved a legislation authorising a state guarantee for loans by the UK and the Netherlands to the Depositors’ and Investors’ Guarantee Fund to cover payment of mandatory minimum deposit guarantees to holders of savings accounts in branches of Landsbanki Islands hf. in those countries.

Adoption of this legislation marks the end of a difficult and protracted international dispute with an agreement providing for the equitable sharing of the burden of the lost savings deposits between the states concerned. The dispute has impeded Iceland’s relations with other nations and the issue has been the subject of heated and widespread controversy among the general public. The adoption of the Act was a difficult step for the Althingi. Resolving the dispute in this manner is regarded as a prerequisite for continuing reconstruction efforts which have been underway since the economic shocks suffered by Iceland in the autumn of 2008 and which have already made very significant progress”.
(Ministry of Finance, December 31, 2009)

We’ll take that as a good sign that the reconstruction of the post-crash economy is proceeding apace. Note, however, that a condition of relative stability is not the same thing as a full return to normality.

Goldman Sachs’ chief economist Jan Hatzius sounded somewhere between restrained and downbeat for the prospects of 2010 in the brief interview he granted the WSJ. See the interview here.

Our own chart study of inflationary expectations based on the data from the University of Michigan and published on the Federal Reserve’s FRED database shows a weak concern for inflationary processes taking hold anytime soon. Mind you, this isn’t a chart of actual inflation, but rather the prediction of inflation in the future.

Note also that the phase after the dot com meltdown until the credit crisis showed an accelerating belief that inflation would assert itself in the future. It is the expectation of future inflation that drives people to accumulate debt (as inflation reduces the cost of repaying debt, assuming you got a fixed rate loan), accumulate real estate and physical assets, and generates a general surge in “animal spirits”. For now, the inflation mind set appears to have fallen well below the trend of the past 25 years.

Anything else we might care to notice ? The map below – first published on Wikipedia and composed by Mike Sefras – shows an interesting situation with regard to US unemployment. There are regions with much worse than average unemployment – some which appear to be bordering on the true desperation conditions of a real depression mirroring the 1930s (black zones on map), other regions that appear to be in fairly good shape (light blue), and an equal amount of in-between zones.

The take home lesson is that the generalized state of misery that brings about massive collective action is absent in the US. There’s enough true catastrophe to get a certain amount of legislative change done, but not nearly enough for a grand social overhaul. This no doubt explains the long and contentious debates in the media and the political mechanisms where radical change and social stasis are in a tug of war for meme dominance.

The following post is by our new New York City contributor, Cornelius Tacitus, an established skeptic of the half baked and the self serving. Welcome, Tacitus!

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Here’s a chart you won’t be seeing anytime soon from your less than determined financial media sources.

This differs how, exactly, from the usual codswallop passed off as an informative analysis of the US employment situation?

First, this uses the entire data series from 1948 until the present, November 2009. The media love to use very limited snapshots that don’t allow the reader to compare one economic phase with another. Very bad form if you ask me. However, a convenient way of avoiding the whole truth.

Second, Tacitus has taken the data one step forward. The notoriously noisy data for the 5 week and less unemployment was first subtracted from total unemployment, leaving a purer data stream of what me might call real unemployment… the kind that shows up as not merely being between jobs but rather seriously out of work.

Then of course, this was divided by the entire working population to give us the rectified unemployment rate that permits us to make accurate comparisons across periods of growth and contraction, apples remain apples and oranges remain oranges.

As we can see, the previous two worst case unemployment phases were roughly 1975 and 1983, the long remembered misery peaks. However, if you compare the present situation, we appear to be one full ‘click’, or one percentage point of magnitude worse then the previously known worst case since the Great Depression, and there’s no clear evidence that we’ve completed the process.

Happy New Year.