MacroScope

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.

In a similar poll in November, a slight majority thought the Bank’s handling of its forward guidance framework had damaged faith on in its pronouncements, but the pool of analysts surveyed was smaller.

The improvement in sentiment may have to do with the fact that growth is picking up, unemployment is falling faster than expected and even inflation has come back within target.   

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.)

Why the mediocre U.S. July jobs report was worse than it looked

U.S. economists were generally disappointed with the net gain of 162,000 jobs last month, well below forecasts around 180,000 and market talk of a possible reading above 200,000. The jobless rate did fall to 7.4 percent from 7.6 percent, but labor force participation also resumed its recent descent.

Thomas Lam, chief G3 economist at OSK-DMG/RHB, says the underlying details of the report make employment conditions actually look worse than at first glance. Here’s why:

The most striking aspect of the Jul employment report is that details of the release appear generally weaker than the uninspiring headlines figures.  The nonfarm payrolls print of 162k in Jul, while modestly softer than expectations, was accompanied by narrower gains in private payrolls (the weakest 1-month and 3-month diffusion data since Aug & Sep 2012), and net downward revisions of 26k in prior months (-19k in May and -7k in Jun, confined within private employment).  Moreover, the employment and workweek details from the Jul release imply that real GDP growth in early Q3 2013 might be tracking weaker than the advance Q2 2013 print of 1.7%.

Obama’s second chance to reshape the Fed

Lost in the bizarre Yellen vs. Summers tug-of-war into which the debate over the next Federal Reserve Chairman has devolved, is the notion that President Barack Obama is getting a second shot at revamping the U.S. central bank.

The perk of a two-term president, Obama will get to appoint another three, potentially four officials to the Fed’s influential seven-member board of governors in Washington. This may buy the president some political wiggle room when it comes to his pick for Fed chair, since he might be able to placate Republicans with one or two “concession” appointments. Every Fed governor gets a permanent voting seat on the policy-setting Federal Open Market Committee.

Elizabeth Duke, the last George W. Bush appointee, is already on her way out. So is Sarah Bloom Raskin, who after a relatively short stint at the board is moving to the Treasury, to be Jack Lew’s Deputy Secretary. Then there’s the awkward suspicion that, if Obama passes up Fed Vice Chair Janet Yellen, by far the favorite for the top spot, she will also step down after a long career in the Federal Reserve system, including many years as head of the San Francisco Fed.

U.S. job openings rise, but nobody’s hiring?

It’s a good news, bad news story: The U.S. Bureau of Labor Statistics’ Job Openings and Labor Turnover (JOLTS) survey in June showed an increase in job openings, but a decline in new hires. The ratio of unemployed Americans to each open job fell in June to its lowest level in over four years.

The number of job separations (government code for layoffs) also fell, mainly due to fewer layoffs. The June numbers suggest some retracing of the gains of the previous month or two, but does not erase them, says Stone & McCarthy Research Associates economic analyst Terry Sheehan.

Job openings rose by 29,000 in June, but the number of new hires fell by 289,000. Simultaneously, the number of job separations also fell 300,000, mainly on declines in layoffs which fell 215,000.

U.S. GDP revisions, inflation slippage tighten Fed’s policy bind

Richard Leong contributed to this post

John Kenneth Galbraith apparently joked that economic forecasting was invented to make astrology look respectable. You were warned here first that it would be especially so in the case of the first snapshot (advanced reading) of U.S. second quarter gross domestic product from the U.S. Bureau of Economic Analysis.

Benchmark revisions to U.S. gross domestic product made for a bit of a mayhem for forecasters, who were way off the mark in predicting just 1 percent annualized growth when in fact the rate came it at 1.7 percent. Morgan Stanley had predicted a gain of just 0.2 percent.

Hours after the GDP release, Federal Reserve officials sent a more dovish signal than markets had expected, offering no hint that a reduction in the size of its bond-buying stimulus might be imminent. In particular, they flagged the risk to the recovery from higher mortgage rates as well as the potential for low inflation to pose deflationary risks.

Uncertain about the effects of uncertainty on jobs

Job number one at the Federal Reserve these days is to bring down high U.S. unemployment without sparking inflation. Job number two, it sometimes seems, is explaining just how unemployment got so high in the first place.

Two recent papers published by the San Francisco Fed offer what look like opposite takes on the topic.

“(S)tates in which businesses cited poor sales also registered disproportionately sharp drops in jobs and household spending,” wrote Princeton University professor Atif Mian and University of Chicago Booth School of Business professor Amir Sufi in a February Economic Letter.

Fear the Septaper

Credit to Barclays economists for coining the term ‘Septaper’

A solid U.S. employment report for June appears to have cemented market expectations that the Fed will begin to reduce the pace of its bond-buying stimulus in September.  Average employment growth for the last six months is now officially above 200,000 per month.

Never mind that, even at this rate, it would take another 11 months for the job market to reach its pre-recession levels – and that’s not counting the population growth since then.

John Brady, managing director at R.J. O’Brian & Associates in Chicago, nails the market’s sentiment: