I took a statistics class back in college. Like many of my other subjects I didn’t do that well in it. I did, however, gain a deeper understanding of what average meant and still continue to aspire to get up there someday.
The United States Government produces no shortage of statistics. The amount of data it releases is staggering.
Let’s take a look at two of the reports it issues—the Inflation Rate and the Unemployment Rate. Why these two? These are the two key measurements that Janet Yellen, Chairman of the Federal Reserve (“The Fed”), has mentioned continuously. The Fed had been buying $85 billion of bonds every month to stimulate the economy. This bond buying program was phased out late in 2014 as they perceived the economy slowly improving. The Fed has been targeting an inflation rate of 2%, which has been a challenge. Inflation has been consistently under their target.
While I understand that there is no objective way to measure inflation and unemployment, caution should be exercised when reviewing these numbers.
Inflation is the loss of purchasing power of your dollars over time. Back in the day, Al Capone was named Public Enemy Number #1 by the city of Chicago. Inflation, however, clearly is Public Enemy Number #1 for investors. Coming in a close second was Public Enemy Number #2—the IRS…but that’s another story…
The Bureau of Labor Statistics (“BLS”) issues the so-called Core Inflation Report monthly. This number strips out food and energy costs. The rational for this is that these two components are too volatile. For now, I’ll agree with that. The Core Inflation rate is currently only 1.7%, or so they say. The stated inflation rate seems very low.
One issue with the inflation rate is that they adjust for what they call “quality improvements.” For example, if you buy a new computer that has more memory, a faster processor and better resolution in the monitor, this is adjusted in the inflation index. The bottom line is that this index is suspect at best.
Investors are interested in what they get to keep after inflation and taxes. Taxes are easy to measure. And yes, they are going up. Using the governments stated inflation rate, however, may disappoint you. Investors need to have their own Personal Inflation Index. Many investors will be faced with the “Big Three” expenses of housing, higher education, and medical expenses at some point in their life. Does anyone really believe that higher education costs are going up 1.7% annually? They’re not. Ask any parent or grandparent that is writing that tuition check. They usually have a cold six pack close by. As a rule of thumb, the cost of higher education has gone up twice the inflation rate. I’ll repeat—twice the inflation rate. Ouch! If you don’t have any children or grandchildren to educate, good for you. You probably retired early and moved to an island….because you can.
Are medical expenses only going up 1%-2% annually? The long-term average is 5.5% and it was 6.5% in 2014. In theory there are forces at work that can, perhaps, bring this trend down.
Health Savings Accounts (“HSA’s”) and the Patient Protection and Affordable Care Act also known as Obama Care were designed to reign in these costs. We’ll see about that.
Housing is another story. Due to the cyclical nature of housing, it tends to rise and fall over time. However, over the long run it typically rises. The government also games this part of the calculation. They introduce what they call “owners’ equivalent rent.” This is to put buying on par with renting. Housing prices, along with everything else, declined with the financial meltdown in 2008. The other issue with housing is that it’s regional.
The BLS also issues the unemployment rate. The official rate, known as U-3, is currently at 5.0%. The good news is that it’s down from 9.9% in 2009. This number, however, excludes “discouraged workers” (people who have stopped looking for work), marginally attached workers (people who haven’t looked for work in the past four weeks), and involuntary part-time workers looking for full-time work. When these workers are included, the unemployment rate, known as U-6, is a staggering 9.8%.
The challenge, of course, for the discouraged worker is to find meaningful work that they feel is worth it. There are many entry level jobs that go begging for workers. This trend will likely continue. For many unemployed people these jobs just don’t make economic sense. The cost of transportation alone may cause someone to not want to accept the job. Also, if an employee has to pay for daycare, it may make working not economically feasible.
A more telling statistic is the Labor Force Participation Rate (“LFP”). This reflects the percentage of people working. This is currently below 62.6% down from its high of over 67% in 2000. You would expect some decline due to the demographics. More baby boomers are retiring every day. However, the population grew by 9.7% from 2000 to 2010. So the decline in the LFP is really due to the economic slowdown that started in 2008.
Don’t ignore the inflation rate and the unemployment rate. These will provide road signs as to when interest rates may rise. Investors, however, should take these statistics issued by the government with a grain of salt. These numbers can be gamed to some degree. The good news is we are not in China.China is the only country that makes the U. S. Government look like they are telling the truth with the economic number they publish. But that’s’ another story. The good news is that If you need any help with the “Lies, Damned Lies, and Statistics”, please call me at (860) 645-1515 or e-mail Thomas.Scanlon@RaymondJames.com
Thanks for your referrals!
The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the forgoing material is accurate or complete. Any opinions are those of Thomas F. Scanlon, CPA, CFP® and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Tax preparation and accounting services are provided by Borgida & Company, P.C., not as a service of Raymond James. You should discuss your tax or legal matters with the appropriate professional. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.