High unemployment putting the ECB in isolation


Unemployment in the euro zone is stuck at 12 percent, an already high rate that masks eye-popping rates in many of its struggling member economies.

But in a press conference lasting one hour, European Central Bank President Mario Draghi mentioned the problem of high unemployment only a few times – satisfied with the central bank’s usual stance of imploring euro zone governments to implement structural reforms to their labour markets, on a case by case basis.

Draghi said:

 … although unemployment in the euro area is stabilising, it remains high, and the necessary balance sheet adjustments in the public and the private sector will continue to weigh on the pace of the economic recovery.   

Governments must … continue with product and labour market reforms. These reforms will help to enhance the euro area’s growth potential and reduce the high unemployment rates in many countries. 

That was it: not a single new solution to the euro zone’s chronic unemployment problem, where in countries like Spain and Greece, well over one in four eligible workers are out of a job.

“This was really eye-opening for me”: Fed’s Raskin shocked at low quality of work at local job fair

The first portion of Federal Reserve Governor Sarah Bloom Raskin’s remarks to the Roosevelt Institute earlier this month were pretty standard central bank fodder. Raskin, on the dovish side of Fed monetary leanings, said U.S. unemployment was still too high, and far more progress was needed in bringing a somnolent job market back to life.

But the second half of her comments offered an unusually personal look at one Fed official’s dismay with the country’s economic situation. Stumbling into a job fair near her house, Raskin was stunned by the generally low quality of positions available. In her own words:

I became interested in this question of quality somewhat by accident. I did something atypical one day. I decided on my way into work I would stop at a jobs fair. There was a jobs fair at a local community college close to my home and I thought, I’m going to, you know, instead of pounding through all this heavy data that we typically look at at the board of governors, let me just go into this job fair. It turned out to be a really interesting morning, I have to say.

Why the U.S. jobless rate might stop falling

The U.S. jobless rate, currently at 7.7 percent, remains elevated by historical standards. But it has fallen sharply from a peak of 10 percent in October 2009. However, that decline could soon grind to a halt, according to a recent paper from the San Francisco Federal Reserve.

Its authors argue that, because the slow but steady decline in the jobless rate has been in part due to slippage in the labor participation rate that is more a product of the business cycle than long-run demographic trends, as the Bureau of Labor Statistics presumes.

In January, the U.S. Bureau of Labor Statistics significantly reduced its projections for medium-term labor force participation. The revision implies that recent participation declines have largely been due to long-term trends rather than business-cycle effects. However, as the economy recovers, some discouraged workers may return to the labor force, boosting participation beyond the Bureau’s forecast. Given current job creation rates, if workers who want a job but are not actively looking join the labor force, the unemployment rate could stop falling in the short term.

Attempting to measure what QE3 will and won’t do

Deutsche Bank economists have tried to quantify what effect QE3 is likely to have on the U.S. economy. For an assumed $800 billion of purchases of both agency securities and Treasuries through the end of next year, the economy gets a little over half a percentage point lift over the course of two years and a net 500,000 jobs – or about two months’ worth of job creation in a typical strong recovery from recession.

In a model-driven assessment based on the past impact of QE1 and QE2, Deutsche Bank Securities chief economist Peter Hooper says this is what the Federal Reserve printing another $800 billion — slightly less than the gross domestic product of Australia — will do:

1. Reduce the 10-year Treasury yield by 51 bps

2. Raise the level of real GDP by 0.64%

3. Lower the unemployment rate by 0.32 percentage points

4. Increase house prices by 1.82%

5. Boost the S&P 500 by 3.06%, and

6. Raise inflation expectations by 0.25%

Apart from the fact we are more likely to win a lottery jackpot of epic proportions than see all of those predictions come true to that degree of precision, the pressing question is whether a 0.32 percentage point reduction in the unemployment rate would be significant enough for the Fed to stop printing money. After all, the Fed tied whether or not it would be satisfied by the results of QE3 to a substantial improvement in the labour market.

Fewer firings do not mean more hirings

Jobless claims fell unexpectedly last week to 361,000. Analysts were particularly heartened by the improvement because the latest figures were finally “clean” of recent seasonal adjustment quirks related to auto factory shutdowns. That’s the good news.

Some lingering cause for hesitation: Eric Green at TD Securities reminds us that recent dips in claims have not necessarily translated into great bursts of new job creation.

Over past periods of this recovery claims at this level have been consistent with (monthly) job growth closer to 200,000. With claims back at these levels, one cannot presume that this will continue to hold given the level of uncertainty and slower growth momentum from which labor demand will lag.

July non-farm payrolls to disappoint a fifth month in a row?

U.S. non-farm payrolls have come in below the Reuters Poll consensus for the past four months, the longest streak since an eight-month period in 2008-09 when the U.S. was in the depths of recession and, at one point, losing more than half a million jobs a month.

Compared with a few years ago when there was a very wild range of forecasts on a given jobs report — the widest spread polled since the financial crisis began was 575,000 for the May 2010 data — economists are now huddling together in a pessimistic pack.

For the July data, due out at 1230 GMT, the range of forecasts in the Reuters Poll (on a consensus of 100,000) has narrowed to a 107,000 spread between highest and lowest, compared with 132,000 for the June data.

Evans doctrine gains traction at Fed

Chicago Federal Reserve Bank President Charles Evans takes a question during a round table with the media in Shanghai March 23, 2010. REUTERS/Nir Elias

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.