Unemployment Numbers Prove Stress Test Is Useless

[girl gone mad]

Unemployment Numbers Prove Stress Test Is Useless
http://www.businessinsider.com/unemployment-number-show-stress-test-is-useless-2009-4

Today's unemployment numbers should obliterate any confidence in the so-called "stress tests" the government is using to measure the financial health of banks. The "baseline scenario" of the stress tests saw unemployment hitting 8.4%. Official unemployment figures hit 8.5% today.

We've said it before: the stress test isn't stressful enough. It's outlook on our economy is far too rosy. The "adverse scenario" that the Treasury Department has described as "highly unlikely" predicts just 8.9% unemployment in 2009. Since there are nine months left to go in year, we're almost certainly going to pass that. We could pass it as soon next month.

What this means is that the stress tests are useless exercises that will tell us nothing at all about the health of the banking sector. Even worse, they could actually undermine confidence since the regulators will be seen as unrealistically optimistic.

[Deja Q]

1. K&R

[Mike 03]

2. I must be a dummy, but I see no connection between the bank capitalization stress tests

and the unemployment rate.

It's apples and oranges.

[amandabeech]

4. The unemployment rate is gage of the consumer's ability to pay debts and

request additional loans.

Banks lose if folks can't pay, and folks without jobs for long periods often can't pay.

One of the big things that the unemployed can't pay are their mortgages. If more can't pay their mortgages, then the value of MBSs goes down.

Don't forget that 70% of the U.S. economy is based on consumer spending.

When people don't have jobs or see other people that they know without jobs, they stop spending just like they are now.

If folks stop spending, the economy goes into the tank.

That's why unemployment numbers are undoubtedly part of the stress test scenario and economic equation.

[girl gone mad]

5. To determine how many of the banks' loans might end up going bad..

Treasury applies two economic scenarios, a baseline scenario and an adverse scenario, for GDP, home price and unemployment figures. Right now the real numbers are tracking Treasury's "adverse" scenario, which implies that the stress tests aren't stressful enough to give us an accurate picture of the solvency of these institutions.

[lib2DaBone]

3. Well, if we could drug test the unemployed... this would help...

Politicians should not worry about stimulating the economy or encouraging job growth.... it's much eaiser to beat the mule than to load the wagon.

The easiest way for a riight-wing nut case to get re-elected is by just advocating drug tests for those lazy unemployed people and the ones who are losing their homes to foreclosure. According to Republican Pols... it's all the victims fault.

SO PLEASE... I wish people would email their feelings on this subject to State Sen Mike Bennett (R-Bradenton, Fl). Let him know how much you support his fundie Christian attack on unemployed and foreclosed Americans.

[e-mail] <[e-mail]>

[notesdev]

7. Let's do drug tests

of politicians before they are allowed to appropriate our money. Let's get 'em on the record as being sober each time they hand another trillion dollars to criminals.

[tblue37]

Self-delete accidental dupe. nt

[tblue37]

6. I have read, though, that the *real* unemployment rate is 17.2%, and

since it is increasing, we could hit Great Depression numbers (25%) frighteningly soon.

[notesdev]

8. U6 is 15.6%

U6 is a lot better measure than the 'official' unemployment rate; U6 is what it feels like to the average Joe.

I can't see us ending the year with that number less than 20%.

[pinqy]

9. You keep saying this

But you've never supported it. What makes it "better?" A statistic is as good at measuring what it's supposed to measure. The U-6 is NOT as good as the U-3 at giving a quick, clear, objective view of the actual labor market and the amount of unutilized available labor. The U-6 IS better at giving a general view of perceptions about the labor market and the amount of potentially available labor.

[notesdev]

10. The U6 is how unemployment feels to the average person

and that is what makes it the relevant statistic. Maybe not a perfect statistic, but certainly a much better indicator of the real world effect of unemployment.

If you look at the U3 composition, you can see that on its face it has rather strict criteria:

http://en.wikipedia.org/wiki/Current_Population_Survey#1994_CPS_Revisions

Among the gems:

"Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for a job (for example, they believe that no work was available). This "definitional change dramatically reduced the number of discouraged workers measured in the redesigned survey. (The group is about 50 percent smaller.)"

It's plain on the face of it - for anyone out in the real world - that unemployment is more than 8%, a good deal more. Everyone is scared witless about losing their jobs. Companies are getting hundreds of applications per opening. The layoffs keep coming fast and furious, in large numbers - but who is hiring? Besides foreclosure processors?

Also, you may want to note that the BLS numbers have been increased by an average of -112,000:

http://norris.blogs.nytimes.com/2009/03/06/will-job-numbers-keep-being-revised-down/

[pinqy]

12. hmmmmmm

"The U6 is how unemployment feels to the average personBut what does that mean? And is that what we want? Do we want to emphasize a number that is based on perception and vague desires, or one that more accurately reflects the actual market?

The U-3 has strict criteria: to be unemployed you must not have worked at all and actively looked for work in the previous 4 weeks unless you're on temporary layoff, but that's necessary to make it objective. Before 1967, what we now refer to as "Discouraged Workers" were included: those who gave up looking because they didn't feel they would find work. But a Presidential Commission in 1963 came to the conclusion that that was too subjective. If someone's perception that they couldn't find work was wrong, or if they were just making excuses, that would distort the picture of how easy/difficult it was to actually get a job.

The definitional change for discouraged workers you refer to was a change in 1994, long after discouraged workers had been dropped out of the Labor Force numbers.

"It's plain on the face of it - for anyone out in the real world - that unemployment is more than 8%, a good deal more." How is it plain? What definition of "unemployed" and how useful is that definition? Is a stay-at-home spouse unemployed? Or a full-time student living with his/her parents? Or a 20 something person living off of parents or boyfriend/girlfriend and not looking for a job? In order to be useful, the numbers have to be scientific, not the nebulous, fuzzy thinking most people use when not thinking seriously about something. All the published measurements, U-1 to U-6 have their uses. But what criteria are important as the official number to be used for policy and business purposes?

"Also, you may want to note that the BLS numbers have been increased by an average of -112,000:
" That's a different survey. The monthly Employment Situation is composed of two completely seperate surveys...the Current Population Survey, which is where the Unemployment numbers come from, and the Current Employment Survey, which is a survey of non-farm Establishments. The revision you're referring to is from the CES, which is NOT used in calculating Unemployment, and mostly reflects late reporting. All establishments in the survey must report their employment numbers, but many are late in reporting, or the numbers need to be revised for methodological reasons (there's a birth/death model to account for establishments that go out of business or are created but in either case can't be counted but still need to be included.)

[Po_d Mainiac]

11. businessinsider is a little weak on the numbers here

Note the date of the link below

According to the new Treasury Department guidelines, the banks would have to assume that the economy contracts by 3.3 percent this year and remains almost flat in 2010. They would also have to assume that housing prices fall another 22 percent this year and that unemployment would shoot to 8.9 percent this year and hit 10.3 percent in 2010.

http://www.nytimes.com/2009/02/26/business/economy/26banks.html?em