MacroScope

Deconstructing UK job numbers

On the face of it, the good news for the British government keeps on coming. Britain’s economy grew surprisingly fast last year and inflation fell below the Bank of England’s target for the first time in over four years in January. The government this month even got a nod from the International Monetary Fund which only last year criticized its austerity programme.

The latest confidence boost came from jobless figures on Wednesday. Not only did the unemployment rate fall to a five-year low of 6.9 percent but pay growth caught up with  inflation for the first time in nearly four years. That provides Prime Minister David Cameron’s government with another lift ahead of the 2015 elections, after it has come  under fire from the Labour opposition for overseeing a fall in living standards.

But a closer look at the data suggests a more nuanced picture.

Indeed, total pay growth in February reached 1.7 percent – matching the 1.7 percent rise in consumer prices in February and above their 1.6 percent increase in March.

But excluding bonuses, wage growth was 1.4 percent  – below consumer price readings for February and March.

Now for the record high number of people in employment at 30.389 million – that was fueled by a record number of self-employed workers, many of whom a recent survey showed would prefer to be employed by someone else.

Weather to make February jobs report a crap-shoot too

Blaming bad economic news on winter is getting as tiresome as tales of snarled traffic, flight cancellations and trips out with the snow shovel in freezing winds.

The February jobs report will be no exception to this U.S. season of climactic howling.

Most of the 97 forecasters who contribute to the Reuters Poll on non-farm payrolls have stuck to their forecasts, resisting the temptation to make last-minute changes based on even more disappointing data this week.

Why UK rates are well below “normal” in one labour market chart

Much ink has been spilled over the past several months over when the Bank of England will eventually raise interest rates from a record low of 0.5 percent, and if they’ll do it before the Federal Reserve does. The pound is trading near a five-year high against a basket of currencies as a result.

BoE Governor Mark Carney and other Monetary Policy Committee members have tried to remind the public and businesses at every chance they are given that a rate rise is still a way off – likely at least a year – and that when it’s time for the central bank to lift rates, it will do so gradually.

Much of the focus until the BoE’s February Inflation Report, published last week, was on the jobless rate and how quickly it has fallen. The latest data show a slight rise to 7.2 percent, so a bit above the 7 percent rate the BoE said it would have to fall below to trigger discussions on rate rises.

Pinning down the January effect on U.S. jobs figures

With Wall Street grappling to hold on to its record highs, a lot is riding on good news from the U.S. economy, no matter how high the Federal Reserve has set the bar for backing off its clear plan to end its monetary stimulus program this year.

After two huge upsets in a row on the important U.S. economic data releases since Christmas — December non-farm payrolls and the January ISM manufacturing report, forecasters are lining up again for an improvement in hiring.

The latest consensus from Reuters Polls is for a rebound to 185,000 after net hiring collapsed to just 74,000 the month before.

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.   

Another false start for the U.S. economy?

Since the global financial crisis ripped the floor out from underneath developed world economies, the world’s biggest one has had several false starts nailing the floorboards back in.

Stock markets have moved in almost one direction since their trough in March 2009 – up – but economic growth and job creation have bounced around.

There are some disturbing signs another false start is afoot, but it has become almost taboo to even raise the issue that the U.S. economy, for all of its progress in repairing bank and household balance sheets, may still be at risk.

Forward guidance is not fully living up to its name

Britain’s economy may have seen one of the fastest rebounds among industrialized nations last year, but half of 56 economists polled by Reuters think the Bank of England has lost some credibility over its handling of the forward guidance policy.

The policy – an advance notice that monetary conditions will not be tightened too fast or too soon – was a way of managing market bets, at a time when the scope for stimulating economies through conventional interest rate cuts was limited.  Many say it was a necessary transition from the ultra-loose rate policy of recent years to a more normal post-crisis one. Indeed, the use of verbal intervention to guide monetary policy has been on the rise in recent years, as shown by this graphic on the Federal Reserve. 

But the BoE’s forward guidance has come under a lot of criticism and its results have been mixed, as highlighted by this Reuters story  and FT blog.

A market-dependent Fed?

It’s hard to shake the feeling that the Federal Reserve is about to begin pulling back on stimulus not just on the back of better economic data, but also because financial markets have already priced it in. The band-aid ripping debate over an eventual tapering of bond purchases that started in May was so painful, Fed officials simply don’t want to go through it again.

If anything, recent data have been at best mixed, at worst worrisome. In particular, August job growth was disappointing and labor force participation declined further.At the same time, inflation remains well below the central bank’s objective.

Argues Dean Croushore, a former regional Fed bank economist and professor at the University of Richmond:

Say it with confidence: Consumer surveys as a leading indicator of jobs

It turns out people are better employment forecasters than economists. A report from New York Fed economists finds that confidence measures gleaned from consumer surveys are very tightly correlated with the path of U.S. employment.

The paper offers some illustrative charts that make a rather convincing case.

The chart below plots the Present Situation Index against the unemployment rate, whose scale is inverted so that high levels represent strong labor market conditions (low unemployment) and vice versa. One readily apparent feature is that the two series move together very closely throughout the period and, most notably, during all five of the recessions since 1977. It’s hard to tell from inspecting the chart, but the highest correlation (0.89) occurs at a two-month lead; that is, the Present Situation Index is even more strongly correlated with the unemployment rate two months into the future than it is with the concurrent rate.

The next chart looks at the relationship between changes in this index and payroll job growth – both over twelve-month intervals. This measure of employment is based on a different survey than the survey for the unemployment rate, but payroll employment is typically growing when unemployment is declining and vice versa. Once again, it’s very apparent that the two measures move closely together, and again formal analysis reveals that the Present Situation Index tends to foreshadow movements in employment by a couple of months. In particular, twelve-month changes in the index are most highly correlated with twelve-month job growth four months into the future – the correlation is 0.83.

Post-Jackson Hole, Fed Septaper still appears on track

With all the QE-bashing that went on at the Federal Reserve’s Jackson Hole conference this year, it was difficult not to get the sense that, barring a major economic disappointment before its September meeting, the central bank is on track to begin reducing the monthly size of its bond purchase program, or quantitative easing.

If anything, the fact that this expectation has become more or less embedded in financial markets means that the Fed might as well go ahead and test the waters with a small downward adjustment of say, $10 billion, from the current $85 billion monthly pace, while waiting to see how employment conditions develop in the remainder of the year.

Atlanta Fed President Dennis Lockhart, who is not a voter this year but tends to be a bellwether centrist on the Federal Open Market Committee, told Reuters on the sidelines of the meeting that he would be ‘comfortable’ with a September tapering “providing we don’t get any really worrisome signals out of the economy between now and the 18th of September.” (Does this count? Probably not.)