MacroScope

The past year of forecasting U.S. payroll growth marks a bumpy road of U-turns on the timing of an elusive turning point to sustainable recovery, an analysis of Reuters polls shows.

In early 2011, an overwhelming majority of economists — 48 of 52 in the April poll and 38 of 46 in the May poll — said that turning point already had been reached.

More than a year later, it still seems a way off.

The U.S. economy added jobs at a monthly rate of 165,000 so far in 2012, far short of the 200,000 most say is representative of strong growth in a recovering economy.

Economists scored an unfortunate hat-trick last month – vastly overestimating the rise in payrolls between March to May. Actual jobs gained in those months were lower than the lowest forecast in each related Reuters poll. To be fair, the margin of error in reporting the non-farm payrolls change is about 100,000, according to the Bureau of Labour Statistics — often leading to massive revisions in historical data.

Median estimates for June data due on Friday is for a gain of just 90,000 jobs, the lowest estimate so far this year, after the disappointing 69,000 in May, which came in 81,000 below the median expectation and 6,000 below the lowest forecast.

The Federal Reserve doesn’t get much love from Washington these days but it did receive a rare bit of political backing on Wednesday as Democrats defended its role in promoting full employment as well as stable prices.

The U.S. central bank has been the target of criticism from members of both political parties as a result of bank bailouts and hands-off rule-enforcement that let predatory and unsound lending practices go unchecked, among other shortfalls.

But discussing legislation narrowing the Fed’s mandate to a single-minded focus on price stability, Democrats questioned the need to drop the full employment side of the dual mandate.

Weekly data on applications for unemployment benefits have gained renewed importance since a weak March payrolls number left economists wondering whether a tentative labor market recovery was about to cave again. The last two weeks’ readings were just soft enough to leave investors thinking the country’s unemployment crisis may not be healing very quickly.

Daniel Silver at JP Morgan has dug deeper into the claims figures and found a curious trend: a repeated and distinctive tendency toward upward revisions in the numbers.

There has not been a downward revision to the initial claims data reported for the prior week since the start of March 2011, and this recent streak is not a new phenomenon—there have been upward revisions in about 90% of the weekly reports since the start of 2008, as well as going back even further to the start of 2000. These revisions are relatively minor (usually adding only a few thousand claims) and do not change the broader trends in the data, but they can lead to the weekly claims reports showing decreases to the more recent levels, whereas if the prior week had been unrevised, the reports would have shown increases in claims.

The trillion euro sugar rush that made Q1 the best start to the year for global stocks in more than a decade has already worn off, but what is most striking is not how quickly it ended. It’s how little the economic outlook has changed.

Cheap central bank money mainly seems to have boosted stocks and the optimism of stock market forecasters, who generally are the most bullish of the lot with or without wads of cheap money.

An analysis of Reuters Polls over the past three months, starting just before the European Central Bank made the first of two gargantuan injections of cheap three-year money into the banking system, reveals what many have fretted might happen.

Economists at times fancy themselves scientists – and they like to borrow from scientific lingo to lend their theories some extra gravitas.

The U.S. unemployment crisis is a case in point. There is a long-running debate among economists as to whether the bulk of joblessness is cyclical, resulting from a lack of demand in a depressed phase of the business cycle, or structural, the product of more fundamental issues such as skills mismatches. The latter problem is more intractable, economists say, and less amenable to treatment via an easy monetary policy.

Nearly three years into the economic recovery, the jobless rate remains at a historically elevated 8.2 percent. Moreover, the economy has only made up about 3.6 million of the nearly 9 million lost during the recession. Against this backdrop, there is widespread concern that the U.S. economy might soon reach a point of what economists call (and here’s where the science comes in) “hysteresis.” In physics, the concept is defined as follows:

While Federal Reserve Chairman Ben Bernanke was noting the recent strengthening of the U.S. job market is “out of sync” with an otherwise slow recovery on Monday, economists at the New York Fed drew attention to the jobless rate itself by saying that some big changes lie ahead for U.S. labor.

The jobless rate may fall faster than expected to less than 5 percent in five years’ time, the economists said in the first in a series of posts but that seems likely to be due more to the fact that fewer people will be in the labor market than to future job creation.

The post notes how, between 2008 and 2012, the employment to-population ratio had a different pattern than in previous economic cycles, with the unemployment rate falling “because the participation rates declined substantially”. Given the U.S. aging population, with 10,000 baby boomers turning 65 each day, this rate is likely to decline even more. The argument has interesting implications, including a potential decline in the usefulness of the jobless rate as a gauge of well-being.

Ask not what your monetary policy can do for you, but what you can do for your monetary policy. That’s the jist of a 1968 paper by Milton Friedman, the poster-child for monetarist economics, entitled “The Role of Monetary Policy,” whose key questions remain hotly debated more than four decades on. Friedman’s answer is simple (some might argue too simple), and all too familiar to those who read the speeches of present-day Federal Reserve hawks – focus on the only thing monetary policy can truly control, which in Frideman’s view is price stability.

By setting itself a steady course and keeping to it, the monetary authority could make a major contribution to promoting economic stability. By making that course one of steady but moderate growth in the quantity of money, it would make a major contribution to avoidance of either inflation or deflation of prices. […] That is the most that we can ask from monetary policy at our present stage of knowledge.

Friedman’s writing suggests he was not a big fan of the Fed’s own dual-mandate, introduced in 1978. Any effort to goose employment through a persistent period of low very low interest rates, Friedman argues, would likely lead to overshooting and inflation.

Looking at the commentary from bank economists on this morning’s “stronger-than-expected” employment report, you would think the country is on a clear path to recovery. Jack Ablin, chief investment officer at Harris Private Bank, was downright euphoric:

This is critical, this is the most important data that we have seen this cycle. This is going to get people’s attention. This confirms that most of the negativity we have seen in the market is derived from the market itself and not the data.

Never mind that nearly half of the 103,000 new jobs “created” in September were accounted for by the return of thousands of striking Verizon workers to their jobs. Brian Dolan, chief strategist at Forex.com, didn’t let that caveat tamp his enthusiasm:

Once seen as an extreme, even imprudent notion in the corridors of respectable central banking, the idea that a little bit of inflation is needed to let some of the air out of a decades-long debt bubble is gaining ground in establishment economics. Even the U.S. Federal Reserve, a central bank that prides itself in offering a high degree of steady predictability on inflation, is now actively pondering taking more drastic steps, such as linking the path of interest rates to the direction of unemployment or inflation.

One particularly striking passage in minutes to the Fed’s August meeting signaled such an approach was much closer to becoming policy than investors and economists had believed:

In choosing to phrase the outlook for policy in terms of a time horizon, members also considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate. Some members argued that doing so would establish greater clarity regarding the Committee’s intentions and its likely reaction to future economic developments, while others raised questions about how an appropriate numerical value might be chosen. No such references were included in the statement for this meeting.

An interesting post on ING’s new eZonomics blog points the reader to a new study on older workers and health.  The findings — as reported in The Lancet — don’t at first glance look terribly surprising:

A poor work environment and health complaints before retirement were associated with a steeper yearly increase in the prevalence of suboptimum health while still in work, and a greater retirement-related improvement; however, people with a combination of high occupational grade, low demands, and high satisfaction at work showed no such retirement-related improvement.

In simple terms, this is saying that if a worker is happy, their health is better. Anyone who has ever had a bad job could have told them that! But the study, of course takes it further.